BITCOIN VS GOLD.
10, Dec 2020
By Daban Aryan
We have heard the debate of Bitcoin as a storage of value and we wanted to drop our two cents on the topic. Firstly, for thousands of years gold has been the status quo for storage of value. Although there have been other commodities used in similar fashion (such as silver), nothing has come close to rivalling the safe-haven asset's position, nor has anything been considered/put into the same conversation as gold… until Bitcoin. So, we will weigh up both sides of the argument and give our own opinion on what we think will be the future of world’s leading safe-haven asset.
Now, there are some fundamental similarities, such as the supply side of the assets; we know there is a finite amount of both gold and Bitcoin, but the major difference is we actually know just how much Bitcoin there is, however, gold is continuously mined – there are even a few ventures starting to go into space to mine nearby asteroids. This means that the price of gold is subject to various different supply shocks as we can end up finding more in outer space, increasing supply, which might aversely effect demand. Another similarity is that buyers of both commodities participate because they place distrust in government, fiat currency, central banking and the Federal Reserve. They see buying Bitcoin and Gold as a means of rebelling against this monetary policy because both parties believe that this system has flaws, therefore, the only protection they have against it is the forementioned commodities. We also have demand similarities for these assets – central banks have gold as a reserve asset and would jump at the opportunity to increase their reserve given that price drops. You have industry demand such as jewellery, aerospace, electronics and the list goes on; there are clear demands for the world’s most precious metal and real-life, useful applications of it. This will most likely remain the case because other metals do not perform as well as gold in certain circumstances which actually contributes to its value. For example, gold can be kept in the form of a coin which doesn’t decay/mould/rot and hundreds of years later it can still be used for the forementioned applications, highlighting why it is classed as a store of value. This gives it an advantage over Bitcoin because, to date, Bitcoin cannot be used in real life as a medium of exchange or at least it isn't widely accepted as such. Bitcoin is also in demand as institutional investors have shown interest; BlackRock, MassMutual, MicroStrategy and even Rothschild Investment Corp have bought up large sums of the asset. Alongside this we also have integration of Crypto services by pre-existing companies such as PayPal, and soon Standard Chartered, to increase investors access to Bitcoin. So, we clearly have similarities in terms of supply and demand for these assets and they are attracting the pockets of wealthy investors.
However, a big difference in our opinion is societies perception of the commodities. Whenever we are in conversation or even hear people talk about Bitcoin it's always "BTC to $100k", "BTC to $500k" or "BTC to the moon, it'll make you rich"; Bitcoin is always used as a means to bring about wealth, not store or protect it. You never hear or see people recommend storing wealth in Bitcoin as a safe and secure means of protecting yourself against fiat and inflation because of the instable price of the asset. Whereas, gold has always been used for this purpose; you don't hear people saying gold will make you rich but gold will just allow you to protect your wealth and maintain its value.
Furthermore, since the 1950's, almost 2/3 of gold supply has been mined. We don't know just how much there is in total, but we do know that it has become increasingly unprofitable to mine due to the decreased supply (1 gram of gold per 100 million metric tons of seawater); it is a waste of time and energy/resources, therefore considered an unprofitable process. If space mining exploration sees success then we can see the gold market rocket but, even upon success, moving gold can be very difficult and inconvenient due to its physical nature and so seeing this as a fix for a long-term problem doesn't seem feasible. Think of it this way: companies will have to go into outer space, mine asteroids for precious metals, bring those metals safely back to earth, and under new legislations, those companies are allowed to keep whatever they mine, once again putting newly found wealth into the hands of a selected few. As a result, a major point to consider is that these ventures can be so expensive and, in relation, the value of gold isn't high enough to make this a profitable exercise. Although Bitcoin mining can be expensive and energy consuming, it is still profitable even in eye of the recent Bitcoin halving.
Unlike gold, Bitcoin is the only scare commodity that has a fixed supply (21 million); just from this fact, we know that Bitcoin will never be subject to any supply shocks that gold is exposed to. Although the supply can be increased, it will require a majority consensus to do so, which is highly unlikely. This means that, unlike gold, supply does not follow demand when it comes to Bitcoin because we know just how much there is, and we know by a specific date we would have mined the world’s supply. Alongside this, Bitcoin shares the characteristics that make Gold what it is, but does so better. For example, Gold has been counterfeited in the past and, although it is difficult, it is not impossible, whereas, Bitcoin has never been counterfeited to date. Above all, Bitcoin can be sent anywhere in the world yet gold needs to be physically transported which proves to be difficult due to its weight (not to mention the time and resources wasted/allocated to ensure that transport is not only logistically plausible but also economically viable). A major positive of this is that in the event of a global pandemic such as Covid, Bitcoin can be moved anywhere without any blockades/seizures as it is all electronic, whereas gold needs human interaction to be transported which brings about heaps of issues and room for error. The blockchain technology is potentially and arguably the greatest invention since the internet as it solves the double-spending issue and has given Bitcoin a strong foundation. It has gained trust from millions of users giving it a market cap of over $3.39 billion in less than a decade, but this doesn’t take away from the fact that Bitcoin’s short lifespan has brought about some issues of its own.
There are some downsides to the use of Bitcoin and that starts with the potential technological risks involved; although issues have not yet been experienced, this is not to say it will not experience any in the future. It may bring about political unrest as it is already being used by countries such as Iran to circumvent U.S. sanctions and by Nigerian protestors to accumulate funds for their movement (we would like to mention that although Bitcoin has been discredited by governments/investors as a means to bypass security and fund criminal activities, fiat currency has been used to do this for decades). Bitcoin outside of its eco-system isn't exactly used as a medium of exchange, meaning you cannot exactly pay for day-to-day products/services using Bitcoin, at some point you will have to convert back into fiat. However, this is changing with adoption, because, as more people possess Bitcoin, more people will deem it as an acceptable method of payment and going into the future, like we previously said, more online entities will begin to accept cryptocurrencies as payments – a recent example being Spotify. Furthermore, if we look at current state of affairs, it is actually wiser to use Bitcoin rather than gold as a method of payment because Bitcoin is more liquid; you can sit in the comfort of your home and sell your Bitcoin for fiat on the spot whereas gold will need to be taken to a broker or a store to be physically exchanged, which is both time consuming and inconvenient. Also, in no circumstances can gold be used online as a method of payment because of its physical nature.
Now, let’s play the cards we’ve been dealt. We know inflation is coming at the bare minimum and we know the dollar will face major difficulties ahead (The Great Monetary Inflation), not to mention, other fiat currencies too, as they all rely on the dollar or are pegged to it in one way or another. The global economy will suffer drastically regardless of the approach the U.S. decides to take (hard/soft default) on their catastrophic debt; this has historically brought about civil unrest and protests resulting in a severe blow to economies all over the world. Investments funded by fiat currencies will not fare well, savings and money stored in banks will also not fare well; the markets as a whole will see chaos on a level unprecedented. Gold and Bitcoin are the only safe hedge against what is coming and, in our opinion, because of the advancements and adoption in technology and the positive impact it has on software, Bitcoin will not only rival gold, but we believe it will outperform due to its contemporary nature and golds inability to develop and evolve as a commodity. This doesn't mean that gold won't be used anymore, it just means that for the first time ever, both assets will co-exist; they will share the global stage as a safe-haven asset as those who distrust fiat will band together and use both.