Game Theory Group

The Blockchain Brief

A Bull's Case: Bitcoin vs. Gold

An attempt at simplifying blockchain concepts, companies, and coins.
By Boris Revsin

There is a compelling case to be made that Bitcoin will replace the $6+ trillion market cap of gold as a store of value for individuals and governments alike, massively driving up the market cap of the King of Cryptocurrencies.

Most people remember their history: we started off bartering. Wood for meat. Meat for hay. Service for other service. Then we moved on to shells, beads, feathers representing some store of value. The harder it was to find on the beach, the more it was worth.

Eventually, people realized that this was stupid. One beach had a ton of beads, another had tons of shells. Exchanges between different tribes were very difficult. So, we started using precious metals that were universally 'scarce'. The Romans would mint a certain weight of gold, slap Caesar's face onto it and send it to Egypt, Gaul and Hispania where it would hold a similar amount of value. Everyone coveted gold, silver, gems and the like because they knew that everyone else coveted the same thing.

But gold is hard to move around, and governments had the bright idea of printing a piece of paper and promising the recipients that this paper could be traded in for gold from the reserves.

A dollar bill represented a certain amount of gold, but was much, much easier to use. Eventually, the trust the people had for gold was matched by the trust people had in sovereign nations printing currency.

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But fiat currency hasn't exactly had a stellar history. From the depths of hyper-inflation in the 1923 Weimar Republic to the disaster that is the 2017 Venezuelan Bolívar, we see history repeat itself again and again. 

And so, gold has endured as a store of value, due to a relatively steady price, a limited supply, and hundreds of years of market psychology baked into it. Don't trust the banks or the government? Bury your gold. Want to protect against inflation? Bury your gold.

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But there are some problems with gold. First, there is little intrinsic value in the 'precious' metal. The declining uses it has in industry hardly account for even a fraction of the price point of $2,000 an ounce. Second, its supply is not really known. For example, China, the world's largest gold miner, produced more than 500 tons of the stuff in 2016. With estimated reserves of over 12,000 tons (shocker: they don't accurately report this figure), China is literally sitting on almost a trillion dollars of gold. Finally, gold is still relatively heavy, and a very poor use case for actually transacting for anything in any meaningful way.

But, wow -- gold has a market cap of over $6 trillion worldwide, used almost exclusively as a store of value.

Enter Bitcoin, a digital currency that is not backed by gold or by the state. Instead, Bitcoin is 'backed' by the tens of thousands of nodes around the world that verify transactions -- the same psychology that gives gold its astronomical price point. As an owner of Bitcoin, you place your trust not in an individual, a metal or a government, but in the decentralized collective. Unlike gold, Bitcoin has a set amount of supply in circulation - 21 million - and a mathematical algorithm that dictates how much of that 21 million will be released to Bitcoin miners every day. Miners cannot choose to mine more, and increase the supply above 21 million. Ever. In comparison to gold, Bitcoin is easy to move. At the moment, it's not a worthwhile currency for buying, say, a pizza, but it's plenty good enough to move $100,000 from one account to another without using a truck and a security team.

As governments begin to acknowledge the transparency, security and speed of the blockchain, I believe that more and more of them will begin to swap their gold reserves for Bitcoin reserves. As the currency price stabilizes and proves itself resistant to feast and famine, governments will stockpile coins in vast quantities. With virtually the same use case as gold, but with far greater benefits, even China will realize there is an alternative to digging holes in the ground.

And now, for some simple math. The market cap of Bitcoin at the time of writing is approximately $300 billion. If my premise that Bitcoin will eventually replace gold as a store of value holds true, we're heading toward a possible $6 trillion market cap.

Could Bitcoin still be 20X under-valued?

Stay tuned.

Boris

Disclaimer: I am not a financial advisor. China has not indicated they are switching any reserves to Gold. Don't lose your money by using a newsletter as research.

Boris Revsin