In a digital world, is bitcoin more valuable than gold?
Well, if you’re a country that gets invaded by Russia, you can instantly transfer all your “gold” halfway around the world, depriving your enemies of the incentive to invade you to capture your wealth.
In a physical world, is gold more valuable than bitcoin? Well, if you let an untrustworthy person have access to your bitcoin, it’s easy for them to steal it or accidentally destroy it. A nuclear weapon won’t do much to the gold stored in a vault unless the weapon lands right on top of it, and nuking a gold reserve bank is probably not in any nation’s war game plan. There is a solution to this problem, however. Distribute your bitcoin to multiple offline safety deposit boxes, and only give individual people access to a small portion of it. In addition, you can easily hide and transport bitcoin: it can fit on a flash drive. Gold, not so much.
The reasons why Bitcoin is more valuable than gold? If your country or business gets invaded or broken into, a nuclear weapon would be hard to wipe it all out, even if an enemy knew where it was stored, because a backup copy could have been made and stored somewhere else, and if the Bitcoin is transferred before the attacker is able to spend it, it is still safe. Even if it is spent, the transaction will be tracked down, as every transaction is kept on a public ledger. Gold, not so much. If you need to transfer Bitcoin halfway around the world, the entire world will confirm that transfer in minutes. Your enemies would have to knock out or purchase half the Bitcoin validator nodes to invalidate that transfer. In this scenario, you probably have bigger problems if half the world’s holders of bitcoin machines are against you.
In the end, both have value. Currently, Bitcoin sits at a ~ 700 Billion USD market capitalization, and Gold is valued at ~ 12,000 Billion. Gold will become even more valuable because there are only about 12 years left of known gold reserves left in the ground that would be economical to mine at current gold prices. This is assuming the current gold in-ground reserves of 50,000 metric tons and the current extraction rate of about 3000-4000 tons remains stable. Of course, previous estimates for oil reserves have been wildly incorrect in the past (thanks in part to fracking). Gold also has a history of value, and is valuable in electronics; however industrial uses amount to only 14% of current gold use. In the grand scheme of things, physical goods are (increasingly) scarce, but a fungible store of value that is easily traded and moved is useful.
The energy use of bitcoin is extremely large, but so is all other economic activity. If you consider a dollar bill a rough estimate of activity and thus energy expenditure, bitcoin “mining” is only expensive because it’s generating new bitcoin; once the bitcoin is mined it’s insignificant and cheap to store and exchange it (compared to VISA). The max transactions per second problem is easily solved with horizontal or vertical scaling, once that’s needed.
Germany currently has very large gold reserves in part to avoid the monetary disaster that happened to it in last century. For a large nuclear-armed country like Germany, this makes sense. For El Salvador, which announced early this year that Bitcoin is now legal tender, perhaps Bitcoin is a safer bet, because they can’t protect themselves from an agressor like the United States, China, or Russia.
If you make the wild conjecture that bitcoin is as valuable as gold as a medium of a storage of value, and currently 1/2 of the value of gold might be better met by storing bitcoin, then bitcoin is currently undervalued by about 8x. If you consider that Bitcoin is much more volatile in price than gold, and thus should be worth less, large investment firms considering this have given a fair price for bitcoin at $38k, about where it is now.
A word of warning: Bitcoin could definitely go to be worth zero dollars fairly easily, due to some unforeseen problem with the code nobody has thought up yet, or something better comes along and replaces it. This is partially mitigated by most bitcoin being stored offline in safety deposit boxes (over 99% of Coinbase’s Bitcoin holdings are stored offline in vaults and safety deposit boxes). Always remember: Don’t risk money you aren’t completely comfortable with losing; the AI trading bots are smarter than you, and they’re definitely smarter than me.
– Nate Cartwright
Human-ISM Partner
The views expressed in this blog post are not necessarily shared by those at our parent company. This post should not be construed as a recommendation to buy, sell, or trade anything, nor speculate on the fair market pricing of anything, including Bitcoin. Cryptocurrencies are inherently more risky than investments that have stood the test of time, and digital attacks against a digital good could potentially cause havok.
