Many investors struggle to understand how to best frame their understanding of digital assets like Bitcoin. Such a new and purely digital asset understandably confuses. For many, a useful comparison is to Gold. In fact, Bitcoin as the digital gold narrative has entered the mainstream.
The last cycles of BTC were retail, and this current cycle is more about High Net Worth Individuals, Family Offices, Institutions, and Corporate treasuries.
The market has seen a slew of institutional leaders give credence to the permanence of Bitcoin as a new global hedge against fiat currencies and inflation, including the CIO of BlackRock, Stanley Druckenmiller, SkyBridge Capital, and Guggenheim Partners.
Bitcoin is considered digital gold because it has similar characteristics but is more efficient and can be measured. While there are estimates of how much gold is left on the earth, no one really knows the true amount.
With Bitcoin, everyone knows there will only ever be 21 million Bitcoin in existence. It also has a proven history as a store of value and a hedge against inflation, just like gold.
It’s no wonder that many find the comparison useful. Both Gold and Bitcoin share similar features as scarce assets, efficient stores of value, highly divisible units, inflationary hedges, assets with low correlations to equity markets, unsuitability, and global market distribution.
These assets both serve as an alternative solution for those who want to hedge portfolios against inflation or expect declines in equity markets.
The Stock-to-Flow model, which is typically used for gold, has recently been applied to Bitcoin for price projection purposes. Gold’s market cap currently sits at roughly $10 trillion, while Bitcoin is currently at about $500 billion.
If Bitcoin truly is digital gold and has the opportunity to flip gold’s market cap, there is a lot of room for it to run.
We will now focus on the key differences. These assets also vary in some ways as well—the relative nascency of the Bitcoin market and it’s purely digital nature cause it to vary from Gold.
The price movements of Bitcoin have much greater volatility than Gold. In physics, we talk about momentum, the technical quantity of movement: it is defined as mass * velocity (p=m*v).
The relatively small market cap of Bitcoin compared to Gold ($500Bn vs. $10Trn) should not fool anyone; BTC is on the same order of magnitude as the market cap of Facebook ($750Bn).
BTC, however, exhibits the volatility of the IPO market. It is subject to greater fluctuations. The digital accessibility of Bitcoin, the granularity and capillary nature of its funding, also allows for more retail participants to trade the asset, causing volatility.
Additionally, while Gold does offer a relatively compact means of transporting value, the requirements for vaults and space are still dramatically greater than that of Bitcoin. Though secure custody of Bitcoin does require significant consideration, the physical space requirements are nearly non-existent.
The ability to transfer Bitcoin also costs much less in terms of time and energy, with multi-billion dollar transfers regularly occurring for less than $10.
Like Gold, BTC has no real intrinsic value. Many suggest that Gold has intrinsic value. Though the definition of intrinsic value can be debated, Gold supporters suggest that Gold is used for things like jewelry and in computer hardware, creating demand for its use.
This is true but marginal in the price fluctuations of Gold. Gold serves as a refuge currency when economies start wobbling. By the same token (pun intended), Bitcoin serves an economic purpose: It serves as a digital refuge currency when the economic activity goes wobbling.
The fact that it has no endogenous cash flows (unlike, say, Real Estate or stock dividends, or debt interest) doesn’t mean it has no value: in fact, quite the opposite. The fact that it is aethereal and a pure internet denizen means it does not depend on the real economy.
What seems like a weakness at first, the lack of endogenous real economic cash flows is a strength when the economic activity goes sideways.
Gold and BTC function as refuge values. BTC has intrinsic value: a completely algorithmically trusted, global financial network offering an unseizable and private asset. It has extrinsic value as an inflationary hedge against monetary debasement, as is practiced today worldwide in reaction to Covid.
It has extreme value as a financial instrument born of the internet: no one government can shut it down, no one corporation can control it. It is an open-source internet denizen that is redefining the infrastructure of finance.
Because BTC’s financial value stems from digital features, we will now argue that BTC is superior to Gold as a refuge currency.
The fact that there are no endogenous cash flows means that the only way to value the asset is through public markets. What is a BTC worth? Whatever was last paid in the markets! The way to value BTC is then supply and demand.
In terms of scarcity of the supply, we can measure the stock to flow these two assets (S2F). Stock-to-flow is defined by total existing supply and new annual production; this is how Gold and BTC are measured on the supply side.
The larger the S2F number, the more scarce the asset (small flow), and, typically, the greater the price. Gold has a near-consistent S2F around 62.
Bitcoin’s flow decreases programmatically and thus becomes more scarce over time. The Bitcoin blockchain was programmed at the outset to halve the mining rewards every 4 years or so: we call this event “the halving.”
No other industry sees its output flow cut in half overnight while costs remain stable: such an industry would die overnight.
The price of the asset needs to double for mining to remain cash-flow positive. In the case of BTC, however, this halving event has already happened twice, and in each past event has led to a 10x increase in price.
This increase in scarcity has historically coincided with dramatic increases in Bitcoin price. This likely helps explain why Gold prices have remained narrowly banded over the past 10 years while the price of Bitcoin has grown over 10,000%: the supply side is structurally different. BTC is a super gold on the supply side.
If we follow the demand side and the S2F chart, BTC will go 10x in the current cycle. This implies a market cap of $5Tr or on the order of Gold ($10Tr). Where is the demand coming from?
The past cycle (2016) was driven by retail. This time around (2020), the demand is institutions, HNWI, and corporate treasuries. A portion of working capital from public companies, usually held in cash and cash equivalents, alone would propel BTC above and beyond this range. We have seen corporate CFO embrace, with great publicity and success, Digital Assets as part of their treasury management.
This trend is accelerating. Because it is simpler to hold than Gold because it provides the same inflation hedge properties, but on steroids, we predict that BTC will replace Gold as a treasury reserve currency within the decade. HNWI, corporate treasuries, and institutions must have intelligent Digital Asset exposure.
It is today a fiduciary responsibility.
|Market Cap||Gold Per Ounce||Price per BTC|
|$337 Billion||$62.35||$19,000 USD|
|$10 Trillion||$1850||$476,150 USD|
|$50 Trillion||$9250||$2,380,852 USD|
The market cap of these two assets also varies drastically. At the time of this writing with Bitcoin hovering at around 3.6% of Gold’s market cap. For those that see Bitcoin as a more efficient and digitally native version of Gold, like JP Morgan says many do, gaining exposure to Bitcoin offers significant upside if it reaches similar market cap levels to Gold.
Inflows to Bitcoin suggest that the tide has started to shift. Depending on one’s risk tolerance and ability to manage risk using derivatives strategies, adding digital assets to a portfolio might be worth considering. Many Two Prime clients look to allocate 5 – 10% of their portfolios to our fund as a hedge with upside.
This article is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. This does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. There is not enough information contained in this document to make an investment decision.