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Why Bitcoin is As Good As Gold

Note: I am not a financial advisor and this is not to be considered financial advice, it is merely my opinion and any investment should not be be taken without speaking to a qualified professional first.

What exactly gives an asset value?

For a traditional asset like a stock, it’s the partial ownership in a company as well as possible claim on their cash flows through a dividend. For a bond, it’s the stream of payments promised. You can easily value these assets by taking the future streams of cash flows and discounting them to the present.

For a commodity like oil, the value lies in the usefulness across a wide range of industries. The price becomes the cost of acquiring, transporting, storing the asset plus the markup the various entities charge along the way. These examples are very intuitive and you won’t find much debate regarding the underlying valuation and metrics.

Assets that act as stores of value like gold are different however. There are no cash flows and the price is substantially higher than the marginal cost to acquire, transport, and store the asset like other commodities. Let’s now take a look at exactly what gives gold its value:

Historical Value Attributed

It may sound like circular logic but this premium exists simply because we’ve ascribed value to gold. For thousands of years, gold has held substantial value because there has been general consensus that it has value. No one questioned it and there has been no reason to doubt it. This has had a compounding effect as the more people who decide gold is a store of value, the more valuable it becomes further solidifying itself as a store of value.

Scarcity / Steady Supply

The main reason gold has been able to maintain this perceived value is because its scarce. Simply put, if everyone had it, it wouldn’t be as valuable. It is also a time consuming, expensive process to mine gold out of the ground and this has created a relatively stable increase in the supply of gold preventing any rapid depreciation in the value from a supply shock.

Actual Usage

The only underlying usage for gold has been in jewelry (and recently in electronics.) While this is a tangible value driver it is by no means what makes gold an effective store of value. A century ago, the U.S. and other major world powers did not have their national currencies backed by gold because it was shiny. For this reason, we can discard the actual use cases of gold in analyzing its value.

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How bitcoin compares

Bitcoin has not even been around for a decade, so it does not have much value attributed as a result of historical consensus. Gold has obviously been around for quite some time and its ability to retain value throughout the ages is a big part of why it is a nearly $8 trillion market now. That being said, it is by no means a predictive measure as to how much value gold will hold in the future. If there was somehow a scarce asset that people believed held value and would continue to do so, the possibility exists to overtake gold as the primary store of value asset. People have argued that because gold has held this role for so long, it will never lose it. I disagree.

Let’s take an easy example… In the 19th century people were happy getting around by horse. It was an effective means of transportation that was used for centuries. It allowed you to travel longer distances at a faster pace than on foot and you could always attach a carriage to carry more people.

Then in comes this new piece of metal on wheels, the automobile. It’s dangerous, expensive and loud, why in the world would anybody switch? At the time that was a valid thought, the current means of transportation were working just fine.

Long story short, we all know how that turned out and so it brings me to my point: Just because something has worked in the past, doesn’t mean it can’t get turned on its head by something better.

I argue that bitcoin is better in nearly every way compared to gold (This article came out after I started writing and presents this argument in a more articulate manner than I do). To summarize:

  • The supply of bitcoin is known with exact certainty therefore there will never be fluctuations. Gold on the other hand still has variability in the amount mined each year.
  • Bitcoin is easy to store, you can have millions of dollars’ worth in a USB drive that no one can touch so long as you keep your private keys safe. Gold, especially large amounts, is expensive and difficult to store.
  • Bitcoin is divisible to fractions of a penny and can be sent quickly anywhere in the world. Try cutting your gold bar in half to send to your relatives in another country.
  • Gold is susceptible to government regulation, there are many examples of governments controlling the use, acquisition, transportation and possession of gold. Bitcoin is censorship resistant meaning no entity can control your funds, you are truly free to spend your money however you wish. The only governmental risk would be a global effort to shut down every exchange making the acquisition of bitcoin very difficult (This is highly unlikely).

It appears that it is only a matter of time before bitcoin starts noticeably eating into gold’s share as the global store of value.

Volatility

When there is an elephant in the room… Introduce him

What scares a lot of people away from bitcoin is the volatility. This is a very legitimate concern as people have trouble putting their money in an asset that fluctuates at the level bitcoin does. The market cap of bitcoin is currently ~$200 billion which may sound like a lot but in the financial world is a drop in the bucket. This leaves the price susceptible to large players and attention grabbing headlines such as “China is banning bitcoin” for the 1000th time causing dramatic shifts.

You have to remember though, that bitcoin is still in its early days, and as more money comes in the volatility will decrease. This has been evident in the last couple of years. The chart below maps the monthly standard deviation as a percentage of the average price that month.

It is evident that since the early days, the volatility has been decreasing over time. As you can see, it has increased over the last year, but that has been a result of the drastic rise in price which isn’t detrimental to the store of value use case. Of course, there was a big drawback from the highs of around $19,000 but that was a result of irrational exuberance in the market due to bitcoin and the cryptoasset class as a whole finally gaining mainstream attention. (CNBC “Fast Money” talking about the crypto craze/carnage every other day).

Nonetheless, as more money continues to enter space, the volatility will subside creating a snowball effect as more people will see the merit in bitcoin as an efficient store of value.

Conclusion:

What gives an asset like gold its value is primarily psychological and results from the opinion of the masses culminating over time. Gold has served this purpose for thousands of years, but in the last decade an asset with properties never before seen has come to light and threatens gold’s standing as the global store of value. It won’t happen overnight, but I am confident along with many others that people across the world will start looking to this new, digital gold to store their wealth.

If you liked what you read, please feel free to “clap”, it helps me get exposure! I also love hearing feedback so comments are always appreciated.

For more information I strongly recommend reading this series of articles that presents a lot of the ideas here in more detail.

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Coinmonks (http://coinmonks.io/) is a non-profit Crypto Educational Publication. Follow us on Twitter @coinmonks and Our other project —  https://coincodecap.com, Email  — gaurav@coincodecap.com

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