Bitcoin — Digital Gold in a Digital World
For thousands of years, gold’s unique monetary properties have cemented itself as the preferred store of value for nation states and individuals alike. It is one of the rarest of the mineable natural elements on any meaningful scale. Additionally, gold has historically had the strongest stock to flow (S2F) ratio of all resources on earth. This is a measurement of the amount of any given resources current supply (stock) divided by the amount of new supply produced annually (flow). More importantly, it successfully resists entropy — it does not decay, rot or evaporate over time. This has proven crucial in its establishment as the world’s de facto store of wealth.
All of the reasons to own gold are still valid in the world today, there has just never been anything to challenge the role it plays in a portfolio.
Until now.
Bitcoin as a Digital Gold
“Bitcoin, having no counterparty risk and no reliance on any third-party, is uniquely suited to play the same role that gold played in the gold standard. It is a neutral money for an international system that does not give any one country the “exorbitant privilege” of issuing the global reserve currency” — Saifedean Ammous
Bitcoin is digitally native asset that is resistant to censorship, seizure, double spending, and inflation. It has unforgeable costliness and exists within an open source ecosystem that makes it easy for individuals to participate in the network with relative ease. Due to Bitcoin’s deflationary characteristics, its S2F ratio will actually surpass that of gold’s over time.
Bitcoin is an unusual asset class, there is quite literally nothing else in the world like it — despite many attempts to clone its protocol and create alternative versions over time. There will only ever be 21 million Bitcoins ever to exist — the purest form of scarcity in an asset that has ever existed. What makes Bitcoin truly unique compared to other traditionally scarce assets (gold) is that this form of absolute scarcity now exists in digital form.
Monetary Principles — Bitcoin vs. Gold
Simply put, money is the most liquid asset in an economy. It is the medium of exchange chosen by individuals that is best suited for them to fulfill their day to day transaction needs. It has taken on many different forms throughout history, — seashells, metal coins, tablets, paper etc. — and is traditionally issued by a central authority.
By manipulating the supply of the money, central banks compromise the fundamental way that participants in an economy communicate with each other.
No matter what form it takes, it typically holds these five properties: divisibility, durability, recognizability, portability and scarcity. Gold lacked in several of these properties which necessitated the introduction of fiat currency, traditionally issued and backed by gold reserves.
Divisibility — You can transact at different scales with relative ease.
In order to execute day to day transactions with gold, you would have to weigh, measure, shave off and securely store the exact amount required for payment. Imagine having to lug around a gold bar and accurately cut off the portion needed to complete your transaction — not very practical. For this reason, silver and then gold backed fiat currency become popular for day to day transactions. While there are only 21mm Bitcoin, each Bitcoin is made up of 100mm satoshis or “sats”. Think of these as the pennies to the dollar, making it convenient to quickly send the required amount needed for any transaction.
Durability — You can hold it over time and it won’t degrade.
Both gold and Bitcoin have impressive durable properties. A bar of gold will not erode over time and each and every Bitcoin will live on the blockchain secured by the network’s hashpower until a day comes if/when the network stops running. Since inception, the Bitcoin network has had an operating uptime of 99.9858292997%. For a network running 24/7 365 this is a pretty great track record.
Portability — You can move it over space efficiently.
Gold is extremely heavy. The standard gold bar held in reserves around the world weighs 438.9 ounces, or 27.43 pounds. $1bn worth of gold at today’s prices would equate to roughly 560,821 ounces, weighing ~35,000 pounds. The costs associated with moving this quantity of money would be astronomical, let alone extremely inefficient, slow and subject to theft along the way. With Bitcoin, the transfer of large sums of money is extremely efficient. In April 2020, a popular exchange Bitfinex made headlines after moving $1.1bn worth of Bitcoin for just $0.68. With Bitcoin it is possible to move vast sums of money across space and time in just a few keyboard strokes or taps on your phone.
Recognizability — You can easily verify its authenticity.
While gold itself as an element cannot be forged or falsely created, counterfeit gold is rampant, particularly in the world of jewelry. Special equipment must be used to confirm the authenticity of the metal in question with serious consequences involved to those who fail to ensure its accuracy. Earlier this year it was found that one of China’s largest gold jewelry manufacturers had been using fake gold bars as collateral for loans totaling $2.8bn over the last five years. The inability to easily authenticate gold made it uneconomical to use for time sensitive and day to day uses. The authenticity of Bitcoin is easily verifiable, with the entire history of the entire money supply verified with every new block. As each new block is confirmed and added to the chain of past transactions (hence the term blockchain), it becomes increasingly difficult and costly for the ledger to be reversed or subject to fraudulent activity. For this reason, Bitcoin has extremely strong settlement assurance.
Scarcity — You can store your value without being subject to surprise supply shocks or rampant inflation
The World Gold Council estimates that the total amount of gold mined throughout all of history is roughly ~198k tons with only ~3k tons of new gold added to the supply annually. This has given gold the world’s highest stock to flow (S2F) historically, a concept we will dive deeper into later on in this piece. Because gold lasts theoretically forever and new supply each year is minimal due to the large effort needed to extract it from the ground, humanity has tended to trade in their diminishing units of wealth (paper fiat) earned over time for this store of value.
Bitcoin’s supply schedule is fixed, with new coins being issued roughly every ~10 minutes and the amount found in each block cut in half every 210,000 blocks (roughly 4 years) in what is referred to as the “halving”. After the recent halving in May 2020, the current reward is 6.25 BTC per block. Bitcoin’s monetary schedule is reinforced and upheld by network participants every day that goes by.
Bullish on Bitcoin: 2020 and Beyond
Bitcoin is the purest and most efficient form of money created in the history of humanity, one that is scarce, easily divisible, portable, recognizable, durable and digital. Bitcoin notably achieves all of these superior monetary properties without having to trust a single group or authority to operate.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” — Satoshi Nakamoto
I believe that Bitcoin presents a solution to many of the large problems associated with today’s monetary system. In a year with trillions of new fiat currencies flooding an already over leveraged system, low interest rates and record levels of debt paired with a global economic shutdown, investors are frantically looking for a sound store of value to allocate their capital. The “digital gold” narrative is slowly but surely making its way around institutional channels, with both public and private companies adopting a Bitcoin standard on their balance sheet.
With a global population of approximately 7.8 billion people today and only 21 million Bitcoins ever to exist, that leaves just ~0.0027 BTC/person. Some estimates claim that millions of Bitcoin have already been lost forever, creating even more scarcity in this economy. I personally have lost access to old wallets with coins on them and optimistically like to think of this as my “donation” to the network. At today’s price ($16,800), it would cost just ~$45 to secure your share of this growing asset class.
Tick tock.
