Gold mining is a centuries old practice, and the modern-day industry is huge. In a strange way, it actually has a lot in common with Bitcoin mining, and with the evolution of tokenization it looks like gold as an asset is entering an entirely new and exciting chapter.
The basics of gold mining
The way we mine gold has changed a lot over the past centuries, from manually intensive labor to a full-blown machine-intensive industry. Today, the economics of gold mining are straightforward; the extraction process is unpredictable and volatile. Gold mining is a long-term commitment and requires significant capital to undertake. There is only an economic incentive to do so when the costs of mining one ounce of gold – prospecting, machinery, labor, government liaising – are less than the value of one ounce of gold.
Because of that dynamic, capital made available for gold mining usually increases when new gold fields are uncovered or when new technologies are developed that lower the cost of extracting gold from the mines. Generally speaking, it is a very challenging market for new players to enter and it is an industry dominated by large corporations with deep historic ties to gold mining.
The price of gold
Now that gold is no longer used to back the US dollar or as a medium of exchange, you might think that mining activity is the number one factor that influences the price of gold. The more gold is mined, the more is available on the market, the lower price. It’s a logical assumption but with gold, this is not the case.
Practically all the gold ever mined in the history of the world, all 190,000 metric tons, is still accounted for in various central banks and private collections. And about 85% of the world’s gold is in fact recycled – this means that there’s a chance the gold you wear around your finger was previously part of an Incan headdress or a Mycenaean face mask.
The price of gold is largely determined by trading activities on exchanges. People still believe in gold as a store of value, buying and selling gold as the world economy fluctuates over time. When the demand for gold increases or decreases, gold goes in and out of storage to adjust to market conditions.
Comparing Bitcoin mining to gold mining
Bitcoin mining actually bears a lot of resemblance to mining gold. While it’s easier for anyone to get into mining Bitcoin, the costs of acquiring the tools and the electric power required to run the equipment are significant. To remain profitable, Bitcoin mining is usually done on a large scale with the location of these Bitcoin mining farms usually in colder climates where the costs of electricity are lower. Often, miners band together to form mining pools to achieve greater economies of scale.
Similar to mining gold, the act of mining Bitcoin is not the key factor that influences the price of Bitcoin. BTC prices are driven by market sentiment and in response to developments around technology, regulation, politics and the economy. That’s why Bitcoin is often referred to as a form of digital gold – in its short history there have been instances when it has acted as a store of value, and over the coming we should see how Bitcoin will fare amidst global economic instability.
A big difference between mining Bitcoin and gold, is that Bitcoin is mined at a prescribed level of difficulty, increasing over time as more Bitcoin is mined. The next Halvening set to take place in mid-2020 is a function of that programmed scarcity.
It’s true that with more extracted gold, finding new gold becomes harder, but it could very well be that new reserves are found in remote regions of the world. Bitcoin has a finite amount set at 21 million. When we’ve mined 21 million Bitcoin, that is all the Bitcoin there will ever be in circulation.
How crypto will make gold more accessible
By tokenizing commodities, gold-pegged crypto assets are making the world of gold trading more accessible to more people. There are already a few gold-pegged stablecoins on the market, but it’s worth taking a closer look at PhiGold.
The business model of PhiGold offers an alternative avenue to engage gold as an asset class. The company has issued PGX, an ERC20 token, which is used to raise capital for funding its gold mining operations at their Barobo mine in The Philippines.
PGX is designed to represent 1/100th of an ounce of gold. The token is initially offered at $10, and after 2 to 3 years it can be redeemed at the spot price of gold which currently stands at $14 per 1/00th of an ounce.
It’s an interesting method that provides investors with a way to essentially purchase gold at a discount, leveraging blockchain and cryptography to twist the way people can gain exposure to the price of gold.
Trade with AAX
AAX is the world’s first digital asset exchange to be powered by LSEG Technology. Offering OTC, spot, and futures, it provides a highly secure, deeply liquid and ultra-low latency trading environment; and a meeting point between crypto and global finance.
Open an account with AAX, or download the app, and experience the next generation crypto exchange.