Bitcoin: Like Gold, But Better

Since Bitcoin's inception, comparisons to gold have been commonplace. While gold and Bitcoin share many similarities in terms of scarcity and issuance, they differ along several key metrics.

In modern economies, gold no longer serves as a good money due to issues with portability, easy divisibility, and acceptability. Compared to Bitcoin, gold is not easy to transport, carry with you, or transfer across long distances. Furthermore, dividing gold is cumbersome, and the prospect of shaving 1 gram of gold off of a 1000-gram bar to make change is something that few would find useful or workable. Lastly, gold as a money isn't widely acceptable — try going into the grocery store and exchanging it for food. It’s just not a thing.

But this specific debate doesn't center around how the two assets stack up as a money — the crux of this debate revolves around whether or not Bitcoin may be considered a store of value.

A store of value is a financial asset that is well-known for being robust in price relative to broader markets.

A good store of value serves as an investment that has a predictable increase in value over the long term, hedges against inflationary pressures, and helps protect against uncertainty in times of geopolitical turmoil.

As an investment, it also helps smooth out aberrations in the market. In other words, a good store of value helps protect against bad times and surprises, as opposed to being subject to short-term volatility.

Supply

Some believe that a good store of value stems from little supply added to existing supply over long periods of time — this is called the issuance rate. Put another way, when little supply is added to an existing supply, this means the inflation rate is low. When discussing stores of value, some analysts like to measure an asset based on the stock-to-flow ratio, which is the proportion of how much current supply exists relative to how much new supply is added in a given period of time. Some believe that the higher the stock to flow ratio, the more reliable an asset will be as a store of value.

Scarcity

Stock-to-flow is different than but related to scarcity, or how rare an asset is. Generally, the more scarce something is, the more valuable it is thought to be — but only if the demand is there. If there isn't demand for an asset, it doesn't matter how rare or scarce the asset may be because no one will want to hold it.

Volatility

Essential to a store of value is the relative consistency of price. An asset that is too volatile will not be useful as a store of value because it will be difficult to predict what the price will be at any given time. For example, if you're storing wealth in an asset and the price fluctuates wildly, it becomes a guessing game as to whether or not you're in a good place to sell or hold

In terms of supply and scarcity, both Bitcoin and gold have a hard supply cap. There can only ever be 21 million Bitcoin in existence, and gold miners can only extract a finite amount of gold from the earth. Gold also has a relatively high stock-to-flow ratio, meaning that it takes a long time for gold miners to increase the total gold supply.

Bitcoin's issuance rate is tightly controlled by its protocol — every four years, the block reward (newly created Bitcoin) cuts in half. This system was designed to ensure that there would never be more than 21 million Bitcoin in existence, a feature ensuring a predictable and gradual issuance schedule.

But in terms of volatility, gold is far less volatile than Bitcoin. Gold prices have remained relatively stable over long periods of time, while Bitcoin prices have been known to fluctuate wildly, as it's especially subject to media effects, speculation, and other exogenous factors.

However, on a longer time-frame, Bitcoin has held its value better than gold. The price swings have been more turbulent, but when compared to gold, Bitcoin has greatly outperformed in terms of total price appreciation.

Whether or not Bitcoin is a good store of value is still up for debate. Some believe that it has the potential to serve as a digital gold, while others believe that its volatility will continue to be a problem.

Furthermore, when thinking about where to store your money, you should consider your appetite for risk. Gold has been around for centuries while Bitcoin is still in its infancy. If you're looking for a more tried-and-true store of value, gold may be a better option. However, if you're willing to stomach the volatility and believe in Bitcoin's potential, Bitcoin could offer greater long-term upside.

Only time will tell how Bitcoin will develop — but for now, it's an asset retail and institutional investors alike are keeping a close eye on.