Analyzing Gold’s Store of Value Standard and How Bitcoin’s SoV Properties Are Bound to Be Better
Throughout mankind's history, there have been countless assets that held value to their users, with gold eventually becoming the standard, even on a global scale. No other asset ever came close to being as widely accepted and valued as gold is, and it dominated the trading industry for hundreds and even thousands of years.
However, in 2008, a white paper explaining the new concept of the first successful cryptocurrency appeared, and only a few months later, Bitcoin was born. In years that followed, Bitcoin was often linked to gold, with many calling it “electronic gold,” or “digital gold.” However, while these nicknames mostly had the goal of explaining the potential (and real) value of BTC, the truth is that the two have a lot more similarities that people might think.
The Golden Rule
In order for an asset to be considered as a good store of value (SoV), it needs to be limited, but also it needs to have value. People need to know that its supply will not expand after they acquire it, as the limited supply serves as a guarantee that the asset will keep its value.
The gold is pretty much the only commodity in our entire history that behaves in such a way. Its value comes from its unique characteristics, such as chemical stability, which makes it impossible to ever completely destroy it or produce it artificially. To this day, the only way to get gold is to buy it, or dig it up and refine it.
In other words, the total supply of gold can never grow, making it nearly entirely fixed. This gives it value, stability, as well as predictable behavior of its prices. For example, gold supply's annual growth rate is always at around 1.5%, but it never goes beyond 2%, as the only way to obtain it is through mining, which is both expensive and uncertain. Due to the limited supply of gold on our planet, it is very unlikely that a massive new undiscovered supply is going to appear and damage the gold's price in any way.
Since the stock of gold remains bigger than the amount of additional gold that gets dug up and sent to the market every year, gold has managed to remain stable, which qualifies it to be a top SoV commodity. It is also often used for illustrating this as the stock-to-flow ratio, which is basically the amount of the asset held in reserves, divided by the newly-produced amount per year.
As long as the stock-to-flow ratio is high, the yearly supply inflation will remain low, and the new additions to the circulating supply will have little to no effect on the price.
How Does Bitcoin Compare?
Now that we have taken a look at gold let's see what is it that makes Bitcoin a type of “digital gold.” As mentioned, many like comparing BTC with gold, but the fact is that it might be an even better asset for the SoV role.
Bitcoin's history goes only a single decade into the past, as it was launched on January 3rd, 2009. It these ten years, Bitcoin was born, it gained initial value, it grew several times, each time beating its former record, and it inspired a flood of additional cryptocurrencies, to the point where there is over 2,100 of them today. It is transparent, and it uses blockchain technology, which prevents issues such as double-spending and transaction details manipulation.
It is specially designed for value transfers between individuals, and it received value due to its uniqueness and usefulness, even though its price remains highly volatile to this day. The important part is that people think of Bitcoin as ‘valuable,' which is the same what the world thinks of gold.
Furthermore, despite being the first crypto, Bitcoin was designed with scarcity in mind, and the most BTC that there can ever be is 21 million individual coins. We have already established how important scarcity is in order for an asset to become an SoV, and while gold holds the title at the moment, we will likely never be able to confirm that there is no huge gold deposit somewhere beneath Earth's surface.
On the other hand, we know for a fact that 21 million BTC is the most BTC that there can ever be, with certain amounts of it already being forever lost due to the fact that they are locked in forgotten wallets.
The only thing that needs to be established is Bitcoin's stock-to-flow ratio, and to compare it with that of gold.
The Influence Of Bitcoin halving
When Bitcoin was announced, it came with a unique effect which we call halving. Simply put, rewards for Bitcoin mining get cut in half after every 210,000 blocks, which happens approximately every four years. This provides it with a type of unique schedule that allows us to predict the future of the coin supply's behavior.
Back when it was launched, the reward for each mined block was 50 BTC, however, four years after that, the amount was cut in half, and it was 25 coins per block. These days, miners only receive 12.5 coins for each mined block, and the next halving is expected to occur next year, in 2020, when the rewards will include 6.25 BTC.
Bitcoin's current stock-to-flow ratio is around 20, while that of gold is over three times higher — at 70. However, due to the halving process, BTC stock-to-flow ratio will grow significantly, which will give it a massive advantage over gold. In other words, Bitcoin has true potential to become the next SoV asset, even though it will take a few more years before it can overtake gold.
It is valuable, it is predictable, transparent, and we know exactly how much of it can there ever be, which is more that can be said about gold reserves, and this is where Bitcoin's true advantage lies.