What is a better store of value – Gold or Bitcoin?

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April 10, 2019 3:06pm NYSE:GLD

gold and bitcoin

From Pascal Thellman: Ever since bitcoin’s creation, numerous parallels have been drawn between this new currency and gold.


Gold supporters often reject bitcoin citing that the cryptocurrency is too volatile and not trustworthy enough to ever become a store of value.

Bitcoin supporters, on the other hand, make the point that bitcoin is fundamentally no different from gold, and that it improves on aspects like seizure protection and inflation predictability.

One notorious supporter of the latter argument is billionaire Mike Novogratz, who publicly stated his belief that “bitcoin is going to be digital gold.”

Throughout this piece, I will analyze what makes a good store of value, and how bitcoin and gold fit into that framework.

Limited Supply

First and foremost, for an asset to be a store of value, that asset must be limited in supply. Otherwise, the value that this asset was meant to conserve would be simply inflated away as more supply is brought to the market.

Secondly, the perfect store of value should not only be limited in supply, but the supply limit should be perfectly known. Otherwise, the asset may be a decent store of value, but it is not a superior unit of account as its total supply is not known.

Bitcoin’s supply is limited, and its supply cap is hardcoded into its monetary policy. Ever since bitcoin’s inception, it has been mathematically provable that there would never be more than 21 million bitcoin in existence.

On the other hand, although gold does have a limited supply on Earth, its total supply can only be estimated. A U.S. geological survey, for example, estimates there are approximately 57,000 tons left to be mined.

However, it’s impossible to precisely know the exact supply limit in gold like it is in bitcoin.

Predictable Inflation

Even if an asset is limited in supply, that does not necessarily make it a good store of value. The asset has to be immune to supply and demand shocks, and that is only possible if the inflation is perfectly known and when it can’t be altered by any external factor.

An interesting case study for this are sea shells, an ancient form of money.

In ancient times, it was hard to find sea shells. Hence, as long as the difficulty to find seashells didn’t change, its yearly inflation didn’t change significantly either. This made it a good store of value for some generations.

However, as soon as professional fishery took off and it was possible to extract sea shells on a commercial scale, they lost their entire monetary value.

This is the danger of a store of value where its inflation can be altered by external factors.

Although gold’s supply is currently averaging at around 1.9 percent, it constantly fluctuates, which has significant impacts on its market value.

Further, it’s impossible to rule out that our estimates of the total gold supply are incorrect, and that a lucky mining firm could suddenly stumble upon a massive gold finding.

If that were to be the case, the gold inflation could skyrocket in a particular year, which would be disastrous for its value.

This is not a problem that’s present in bitcoin.

Bitcoin’s inflation is hardcoded into the protocol, and it is possible to accurately predict exactly how many bitcoins will be generated at a future date.

For example, in 2024 exactly 328,125 BTC will be generated, which is a 1.69 percent supply increase. Such accuracy in predicting inflation is not possible in gold.

Durability

Astatine is the rarest element on Earth, with only 30 grams estimated to exist on our planet. So this satisfies the limited supply requirement of a store of value.

However, due to its radioactive nature, this semimetal is also highly unstable. So, even if you managed to get ahold of 1 gram of this element, it will vanish almost instantly.

It’s therefore clear that for a store of value to conserve value in the long term, it must be highly durable.

It’s unfortunately hard to compare gold and bitcoin on this point, due to their highly different medium.

It’s fair to assume that gold is more durable than bitcoin in the case of an apocalyptic event that would shut down the internet worldwide. However, in the case of such a disaster, would owning gold be a high priority for the survivors?

Ease Of Transport And Protection

A good store of value must be easy to transport and to protect. Otherwise, it’s an inconvenient option for individuals of considerable wealth and for individuals living in authoritarian regimes.

An interesting example is the current situation in Venezuela, where gold is being confiscated at the airport from families trying to escape the country.

This problem would non existent with bitcoin, as said families could simply memorize the private key to their bitcoins, making it impossible for anyone to know that they are carrying bitcoins with them.

Historic Track Record

Having a historic track record is crucial for a good store of value. As humans, our logical thought process is structured in a way that we try to look for patterns in the past and then extrapolate them into the future.

This is why we trust people that we have known for a long time, and why we often purchase the same brands over and over again. Although this could be considered a flawed approach in some cases, we apply the same thinking for stores of value.

It’s a lot easier for an individual to trust gold’s ability to store value than it is to trust bitcoin’s. After all, gold has been the world’s dominant store of value for thousands of years, while bitcoin has only been around for a decade.

That being said, estimating how much historic track record an asset needs for it to be trusted by the masses is hard.

Time is currently on gold’s site, but it will remain to be seen how long that benefit can outweigh the other advantages that bitcoin can bring to the table.


The SPDR Gold Shares (GLD) was trading at $123.53 per share on Wednesday afternoon, up $0.38 (+0.31%). Year-to-date, GLD has declined -0.10%, versus a 8.25% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 35 ETFs in the Precious Metals ETFs category.


This article is brought to you courtesy of Benzinga.


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