Anybody who has been keenly following the news around bitcoin in the past several months must have heard about the bitcoin and gold comparison more than once. This is always an interesting comparison due to the financial implications of the answer. If bitcoin is the digital successor of gold, then its current valuation is considerably lower than it should be.
Gold, The Financial Asset
Gold is currently estimated to have a market cap of 10 trillion USD. That is a huge amount of money for this precious metal that is mined beneath the ground. Notably, it can be used to make jewelry and other expensive pieces. But, nobody in the financial world tries to defend the metal’s value by saying that its value arises from its real-world use cases.
The key reason why gold is worth all this money is because its supply is entirely predictable. While some geopolitical events or policies may change the constant supply of gold entering the global financial markets, the supply is plentiful which makes it possible to use the metal as a means of payment but not too much to make it worthless.
That is the particularity of gold. The value of gold does not arise from the fact that it is rare. The precious yellow metal is valuable since it is exactly the right amount of rare. In the case that it was too rare, it would not have become quite popular as a store of value since it would not be used seamlessly for trade.
The metal that is chosen to translate wealth into an asset cannot be excessively rare which may have made coins too small; else it would have been quite challenging to give every person even a fraction, nor too big; because that would complicate the exchange and transportation of the precious metal.
The rest of it is what is known as the network effect in the financial world. Some people have decided that gold had some value and readily accepted it in exchange for goods and services that led others, in turn, to operate in the same manner. Interestingly, this phenomenon has just amplified through the centuries. That is the reason why gold is worth significant amounts of money.
Bitcoin Aims To Take Over From Gold
Gold’s position at the throne of being the most important asset in the global financial world appears to be facing challenges in the past few decades. Although it has been used to back many currencies for many years now, including the US dollar, it is poorly adapted to the modern economic infrastructure.
It is nonetheless a testament to its strength and investor’s faith that the precious yellow metal has majorly surpassed many other markets since then. But in the past five years, Bitcoin has come up as a worthy challenger to gold’s haven position. Since its inception 12 years ago, bitcoin has surged from less than a cent to its current value above $52K.
But, there is an argument to be made that BTC is a considerable competitor to the gold market since it is becoming easily exchangeable. Also, its excellent narrative of decentralization appeals to many millennials and it offers robust security with cheap transaction costs.
In January, Bitcoin was estimated to be worth between 2% and 7% of gold’s market capitalization. By February 19, 2021, as bitcoin inches closer to the $1 trillion market capitalization mark, analysts believe that the crypto is worth around 10% of gold’s market cap.
This spike was relatively insignificant initially but investors are now taking note as it is evident from the institutional investors joining the crypto space. Some believe that bitcoin has more room for growth while others think that it is just another bubble that has developed in the market. The naysayers point out factors that may help gold remain the only viable store of value in the long term. Who is right on this matter?
Bitcoin Is Still Quite Young
CryptoQuant analysis indicates that the realized market cap of bitcoin is quite lower than what one might expect. Many of the coins are believed to have been lost forever and some of them have not even moved for several years now. In that case, bitcoin is still just about 2% of gold’s estimated market cap. If it were to move to about10%, the bitcoin price would need to rise to about $154,000.
Thus, bitcoin is still an infant when compared to gold and it is not replacing gold just yet. Gold has proven to be a dependable store of value for centuries now. What matters, for now, with gold is not the real world use-cases as much since it has a long proven tradition of a secure asset which individuals, corporations, and states use to store their money for the long term.
On its part, bitcoin is just 12 years old. There is not enough time and data available to declare the crypto to be the next store of value. Is it better suited to the digital age than gold? Most definitely. Is it easier to exchange bitcoin for actual dollars? Of course yes. Will it go ahead to outperform gold in the coming years? It is highly likely.
However, it needs the trust of investors to become a major store of value, something technology, and price action cannot replace. Trust takes a lot of time to build. But bitcoin appears to be heading in the right direction with more institutional investors coming into the market.
More Bitcoin Bulls Are Joining The Market
Earlier this month, Canada authorized the first Bitcoin ETF to operate in the country. Also, news has emerged that more bitcoin bulls are joining the bitcoin market. Tesla invested $1.5 billion into bitcoin as Grayscale and MicroStrategy have increased their holdings in the market.
The flagship crypto has reached the $53,000 level and many now wonder what the future holds. As it stands, Bitcoin is even getting a vote of confidence from many other sources. Billionaire investor Jeffrey Gundlach referred to bitcoin as the next ‘stimulus asset that may exert downward pressure on gold. In that context, a Financial News article published:
“Gundlach’s comments are the latest in a slew of analysts and investors predicting that bitcoin may soon replace gold as a digital safe haven asset. JPMorgan’s Nikolaos Panigirtzoglou is one such bull, having made the case for bitcoin as digital gold on several occasions with a long-term price target on the coin at $146,000. However, the bank has said it does not expect bitcoin to reach that target soon, with price volatility informing an overall peak prediction of $35,000 this year.”
Notably, bitcoin has already surpassed the projected peak of $35,000 and it appears to have more momentum in it to rise towards $60,000. Gundlach has always been a major gold proponent. However, bitcoin seems to have gained his attention as well. On February 18, 2021, he tweeted:
“I am a long-term dollar bear and gold bull but have been neutral on both for over six months. Lots of liquid poured into a funnel creates a torrent. Bitcoin maybe The Stimulus Asset. Doesn’t look like gold is.”
Will bitcoin take over from gold as the biggest haven asset? Time will tell.