Bitcoin is not worth more than gold
What’s worth more, pizza or rope? One large pizza costs about R90 and 1 meter of rope costs about R50. So is pizza worth more?
You could ask why we are using a large pizza, and why are we using 1 meter of rope. Perhaps you could argue that a small pizza would be a better comparison. But this just begs the question, what do you mean better?
Herein lies the problem with comparing Bitcoin and gold values. How will you choose what units to measure Bitcoin in? How do we compare those with gold?
The media frequently shares stories about how Bitcoin is worth more than gold. In March Fortune wrote that “ Bitcoin [rose] to $1,289.09 per unit while its fellow safe haven asset, gold, fell to $1,231.5 per ounce.” Even Forbes got involved, saying that “the price of bitcoin has risen steadily, finally surpassing the cost of an ounce of gold on Thursday.” More recently, the bitcoin news hub Coindesk wrote that “More than five months after bitcoin and gold prices hit parity, bitcoin is now worth nearly three times as much as the more traditional store of value.”
None of these stories are technically incorrect. But none of them are technically interesting either.
The difference between real and nominal values often trips people up. I remember once having a discussion with an economist over a beer about which country in Africa had the strongest currency. Neither of us knew exactly.
The economist guessed that it would be Tanzania, because of their strong growth. I thought this was a stupid reason to think that a country’s currency would be strong. I thought that drastic reserve bank actions would be much more likely to to win out over a big enough sample size. Sure enough, the correct answer was the Zambian Kwacha. The reason? The reserve bank had recently gone and just removed three zeros from all of their bank notes.
Now imagine for example that I were to define a new unit of measure for bitcoin. Let’s call it a “fizzpop”. I define 1000 fizzpops to be equal to one bitcoin. Is bitcoin still worth more than gold? A fizzpop is certainly not worth as much as an ounce of gold…
Business Insider came close to realising this. They circulated an article optimistically titled Don’t be fooled by Headlines saying Bitcoin’s Value is Nearly Three Times Gold. Unfortunately, their explanation, which only appears 3 sections later, leaves one with the distinct impression that the most that they are willing to say is that you should maybe also consider some other factors. This is hogwash. When comparing Bitcoin and gold, you should, obviously, only be considering other factors.
There have been more serious offenders however. News site IOL peddled an article titled Why is Bitcoin worth more than gold? It includes such reasons as anonymity and low transaction fees. One example of a reason that it doesn’t include is that that’s just how we’ve defined a unit of Bitcoin so it’s meaningless.
I suspect that misunderstanding about nominal and absolute values are also why so many people seem to constantly be asking whether it’s “too late to get into Bitcoin”. A priori this seems like a weird question. You don’t often hear anyone asking whether its “too late” to get into property, equity, gold, or any other asset class, even though most of them started out long before you were even born. So why the concern about it being “too late” to get into Bitcoin?
Perhaps that’s an oversimplification. I do hear the arguments that say that, unlike other asset classes, Bitcoin might not have an indefinite run.
But I don’t think that that’s the main reason so many people are asking whether it’s “too late”. I think that a lot of people are looking at the absolute price of one Bitcoin and thinking “Wow, $4000 is a lot of money for a Bitcoin. I must be too late”.
Here’s a simple test for you. If Bitcoin had been measured in fizzpops instead, and currently cost $4 per fizzpop, would you still be comparing it to gold? Would you still be worried about it being “too late”? If not, you’re probably being fooled by numbers.
Neil du Toit is a data strategist at Q Division. In his free time, he writes more interesting articles for his personal blog.
