Uganda

Is gold becoming inflationary? Can Bitcoin replace it as a store of value due to its scarcity and reliability? Are Uganda’s numbers implausible? Questions arise.

These are fraught times for the cryptocurrency and blockchain sector, so it isn’t surprising that industry proponents might seize upon any promising news to help charge flagging markets. A Reuters report out of Uganda last week about a massive gold ore discovery supplied just this kind of fuel.

What does the state of gold mining in Africa have to do with the price of global Bitcoin (BTC)? Quite a bit, potentially.

Bitcoin has periodically laid claim to being digital gold largely on the strength of its strict 21 million supply limit, which makes it non-inflationary and a good store of value — in theory. Gold, of course, is the store of value par excellence, with a limited supply and a solid track record that goes back millennia.

But, if Uganda is sitting on 31 million metric tons of gold ore, as the government declared, might not that substantially boost the world’s gold supply? That in turn could lower the price of gold — and make it a less secure “store of value” generally. Gold’s loss could be the cryptocurrency’s gain.

Some drew encouragement from this notion. Microstrategies CEO Michael Saylor, for instance, posted a video on Twitter about the Ugandan discovery of “huge gold deposits” which might net 320,158 metric tons of refined gold “valued at $12.8 trillion.” As Saylor noted on June 17: “#Gold is plentiful. #Bitcoin is scarce," further telling CNBC:

“Every commodity in the world has looked good in a hyperinflationary environment, but the dirty secret is you can make more oil, you can make more silver, you can make more gold […] Bitcoin’s the only thing that looks like a commodity that is scarce and capped.”

But, perhaps there is less here than meets the eye. The 320,158 metric tons of refined gold that the Ugandan mining ministry spokesman said could be produced from the new deposits in the country’s northeastern corner would far exceed the 200,000 metric tons in above-ground gold that exist in the entire world today. One gold mining trade publication went so far as to suggest the Ugandan government may have been confusing metric tons with ounces in its projections. 

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The World Gold Council was asked for comment about the Uganda discovery and the plausibility of its numbers. The Council doesn’t typically comment on media reports of gold discoveries, a spokesperson told Cointelgraph, but added:

“In the absence of formal ore reserve/resource declarations, we would not expect these ‘discoveries’ to contribute materially to mine supply in the foreseeable future.”

But, to the larger issue, Saylor may have a point. The fact is that more gold can always be mined, whether in Uganda or somewhere else, especially with advances in surveying and mining technologies, including aerial exploration. And, if so, doesn’t this make Bitcoin, with its strict 21 million BTC limit, look non-inflationary by comparison — and a potentially better store of value?

Garrick Hileman, head of research at Blockchain.com, told Cointelegraph:

“The Ugandan find underscores why the approximately 200 million holders of Bitcoin believe that ‘digital gold’ — Bitcoin — is superior to actual gold in terms of its scarcity and reliability as a store of value in the decades to come.”

As was the case with other major gold discoveries in history, like the 19th century South African gold rush, the introduction of this much new gold — or even just growing awareness of the Ugandan find — “could have significant negative price implications for gold over the coming years,” Hileman said. 

Not all agree with this assessment, however. “People label Bitcoin as ‘digital gold’ because it was considered a hedging asset, especially against the stock market. This has not been true at least for the last three years,” Eshwar Venugopal, assistant professor in the department of finance at the University of Central Florida, told Cointelegraph.

The increasing participation of institutional investors means BTC is now more correlated with risky assets like equities, whereas a store-of-value instrument should be uncorrelated with the stock market. Added Venugopal:

“When institutional investors enter such markets, their usual trading stop-loss limits apply and assets in their portfolio and by extension the market become positively correlated with each other. The fact that Bitcoin is bought and sold just like any other risky asset undermines the ‘digital gold’ tag given to it.”

In point of fact, “it is clear that the majority of investors do not see Bitcoin as digital gold yet,” Ferdinando Ametrano, founder and CEO of CheckSig — and a founder of the Digital Gold Institute — told Cointelegraph. 

Meanwhile, Bitcoin is not governed by any entity or a third party and hence is subject to price swings purely based on how the market prices it, Vijay Ayyar, vice president of corporate development and International at Luno, told Cointelegraph. This means that it probably has to go through a significant maturation before it ever becomes “digital gold.” As Ayyar further explained:

“Any new monetary asset undergoes a process of monetization through which it becomes more widely regarded as a store of value as a first step. This process could take another 5–10 years even. Gold has been around for thousands of years. Hence, while Bitcoin has all the properties of potentially replacing gold, this may still take some time.”

The Bitcoin network has been in operation for a little more than 10 years and market penetration is still less than 1% globally, Ayyer added — though others believe global adoption rates are higher. In any event, “Bitcoin penetration needs to get higher levels as a first step.”

Are the numbers plausible?

As mentioned, the numbers put out by the Ugandan mining ministry drew some skepticism. Generally speaking, gold has survived as a store of value over the millennia because it is durable, scarce and difficult to mine. A great deal of gold ore is required to produce a single gram of refined gold.

Typically, a high-quality underground gold mine will yield 8 to 10 grams of refined gold per metric ton of gold ore, according to the World Gold Council, while a marginal quality mine generates 4 to 6 grams per metric ton. If one settles on a rough average of 7 grams of refined gold per metric ton of gold ore, this means Uganda’s mines will generate about 217 metric ton of refined gold, a far cry from the 320,158 metric tons of refined gold that Solomon Muyita, spokesperson from Uganda’s Ministry of Energy and Mineral Development, told Reuters could be produced by the country’s new discovery. The addition of 217 metric tons would raise the world’s stock of “above-ground” refined gold by only about one-tenth of one percent.

All this has only an indirect bearing on the Bitcoin “digital gold” question, which Venugopal, among others, acknowledges is a difficult one. As with fiat currencies, “Bitcoin’s value comes from adoption and users’ faith in the system,” he said. Before Bitcoin can be a store of value, it requires a user base comparable to that of a large fiat currency, in his view, adding:

“I see Bitcoin becoming a risk asset but not as a ubiquitous store of value because it is volatile, highly inefficient to mint and challenges sovereignty.” 

In fact, Venugopal views Bitcoin more “as an experiment to show what is possible and spur innovation.” It has accomplished this, but he expects a more “efficient” cryptocurrency to eventually emerge and supplant it, or perhaps a central bank digital currency. 

Ayyer agrees that BTC’s recent price volatility hasn’t brought it any closer to achieving “digital gold” status. “Bitcoin has never existed under circumstances we're currently witnessing and hence this is definitely a test for the asset class as a whole.”

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Elsewhere, Hileman is more optimistic. Technologically, Bitcoin simply offers more than a commodity like gold can ever deliver in the long run as an SoV. “Algorithmically deterministic supply schedules such as Bitcoin's hold a big predictability edge over gold.” And predictability is critical for “taming” exchange rate volatility, which must be subdued “for something to evolve from serving as a ‘store of value’ to actual ‘money,’” Hileman said.

And, while relatively few people view Bitcoin as a store of value today, things need not remain that way. “At the burst of the dot-com bubble, Amazon lost 90% of its value because most investors did not understand how pervasive e-commerce would become,” commented Ametrano. Blockchain technology may be similarly under-appreciated today, he added, referencing economist Paul Krugman’s 1998 prediction that the internet would prove less relevant than the fax machine.

Sometimes intelligent people simply don’t know.