The narrative of “bitcoin is digital gold” has been around for some time. Of all the frameworks used to value bitcoin, it is one of the few we consider having a number of economic merits supporting it. After all, Bitcoin’s seminal whitepaper itself does reference a similarity to how Bitcoin is mined:
The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.
In this narrative, with the price of gold hovering around 1,800 USD per oz, dividing the total market capitalizations of gold to bitcoin can give estimates ranging from 140k to 500k per bitcoin depending on what you consider to be gold’s available supply.
JPM uses only private gold to arrive at the lower range, whereas Guggenheim uses almost all known gold. While we can heavily criticise this relative valuation framework, the most glaring issue being an implicit assumption that the market has priced gold correctly and bitcoin incorrectly at the same time, let’s first compare how bitcoin stands up to gold in being a store of value.
A store of value, after all, is some asset that can be saved today in order to be exchanged for goods and services in the near or distant future holding more or less the same value it has today. Gold and to some extent Silver have been humanity’s primary stores of value even in distant civilizations who would have never met each other. A store of value has ten important characteristics:
verifiability, and to break the rhythm,
ease of storage, and finally
privacy. Let us now discuss how Bitcoin ranks versus gold.
Scarcity is without a doubt the most important characteristic of a store of value. An asset in abundance cannot be a store of value because then its value will be dictated by the prevailing supply and demand forces at any given time as opposed to now versus near or distant future.
All the gold mined in history sums to about 200k tonnes with another 55k tonnes in known reserves. It is most definitely rare. If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure around 21 metres on each side.
Bitcoin has a fixed supply of 21m coins, and we know exactly the quantity mined at any given time. The common criticism that anyone can fork Bitcoin, so technically it has unlimited supply, is a flawed and tired argument that we will address in depth in a later post.
Winner: Bitcoin, with the slightest margin.
A store of value needs to be valuable in near or distant future, hence the requirement for durability. Gold is nearly indestructible with low reactivity with other elements. In short, gold stays gold in most environments and use cases.
Bitcoin since 2009 to this date has been operational more or less in the original form that Satoshi envisioned. After Segwit in 2017, the next major upgrade, Taproot, took four years to arrive. The base layer of Bitcoin is extraordinarily boring, and while that would be problematic for the breakneck speed of development in Web 3.0, it is perfectly fine for a store of value.
A blockchain that keeps doing hard forks is not durable, and would make a poor candidate for a store of value. Frequent hard forks might be a virtue for innovation, but they are a vice to anyone looking for a digital store of value.
A store of value without worldwide acceptability cannot be of much value. Gold has a history of being acceptable as old as humanity itself. Bitcoin while becoming increasingly accepted, is still only just over a decade old and has a long way to go.
Commercially traded gold has to meet strict specifications. In that sense, all commercially-traded gold is fungible. All bitcoins are interchanged with no way to discriminate within the network.
Divisibility is one reason real estate doesn't make a good store of value. Gold can be sold in any denomination required, although publicly-traded gold has to meet specific requirements. Although dividing up gold is certainly possible, it requires some specialized tools and is not a skill available to every person. Furthermore, the price generally tends to go up for smaller amounts of gold in retail markets.
The smallest unit of bitcoin is a Satoshi at 1/100 millionth of a bitcoin. No matter how it is divided, the price scales linearly with the divided amount.
A store of value is meant to store value, not to be the main bet in a portfolio. Gold certainly has its bouts of volatility, but has much lower volatility compared to bitcoin. While bitcoin’s volatility has been on a somewhat downdrift from the low triple digits, since 2013, it has averaged roughly 80% annual volatility to date. Over the same time period, spot gold has experienced 15% annual volatility.
Historical Volatility - Bitcoin vs. Gold. Source: Interactive Brokers, CoinGecko
The downward drift in Bitcoin’s volatility is almost sure to continue as it becomes more of a macro risk asset and integrated into the financial systems via an ever expanding spot and derivative market, but we are still quite some time away from seeing gold-level volatility for bitcoin.
Gold is mostly traded in some predetermined form, such as ounces or bars. It is however expensive and difficult to transport from one point to another. With Bitcoin, especially with advancements in the lightning network, it is as easy and fast as you can blink.
For significant value, Bitcoin wins by a landslide since the transaction fee is agnostic to the size of the value transferred. There have been a handful of billion-dollar transfers in history that cost less than $50 USD to transfer.
In order to be acceptable for an exchange of value, one needs to be able to verify the authenticity of the store of value asset itself. How many people do you know that can hold a gold bar and tell you whether it is authentic or not within seconds? With Bitcoin, you can get as many network confirmations as you are willing to wait for.
Ease of Storage
Gold is moderately easy to store. Remember, all the gold in entire human history can fit in a cube only 21m per side. While the environmental requirements for storage are light, gold requires heavy physical security. For bitcoin, your private key is all you need to protect it. In your head even if you can memorise it.
Hardly anyone holding significant amounts of gold would like to advertise such a fact. Gold can provide perfect privacy especially if melted to indistinguishable pieces and erasing any trackable information.
One of the most irritating false narratives that the media keeps perpetuating about Bitcoin is that it is some completely obscure parallel financial system where only illicit transactions take place. In fact, Bitcoin is pseudonymous, and it makes a poor choice for anyone trying to cover their tracks. Ever seen a drug deal go down with parties preferring to scan QR codes as opposed to taking cash?
While identities are not linked to addresses, by the virtue of blockchain being a public ledger it means that every transaction is available for everyone to see. Just ask those FBI agents their opinion about Bitcoin’s anonymity.
With 5 wins for Bitcoin, 2 ties, and 3 wins for gold, we think Bitcoin is a slightly better store of value. While the categories are not of equal importance, it is not exactly a secret that the younger generations have embraced digital assets far more than their elders. This is a pattern that is likely to continue as the world of perpetual QE and any imaginable kind of stimulus pushes more people to look for stores of value for their wealth. Bitcoin has proved to be an excellent candidate deserving of consideration alongside gold in that regard. The prevalence of BTC on Ethereum is testament to the excellent properties of Bitcoin as an unbiased store of value.
While the blockchain technology is still frequently and erroneously equated to Bitcoin, it is important to note that the Bitcoin whitepaper pioneered blockchain as a technology and bitcoin as its first and most well-known use case. A truly remarkable achievement for a new technology to mostly get it right, the first time!
This article was originally published on Firinne Capital during my time as Head of Research.