What are the differences between #Bitcoin and #Gold? If you put aside any personal views and stick with their pure characteristics, the two are not truly different from a monetary perspective:
1 – Both have limited supply, but at the same time, they can be divided into very minuscule units.
2 – Both can represent a very large amount of wealth as long as the population recognizes their intrinsic value.
3 – Neither Bitcoin nor Gold can be directly and easily used for day-to-day payments.
4 – Both have well-defined and immutable characteristics that make them perfect “yardsticks” to measure the value of other assets.
I would like to spend a few words on the first 2 points in particular. Gold has been historically considered a precious metal in Asia and Europe. However, this wasn’t the case for the native populations of the American continent before 1492. Why so? Because in the American continent, gold was abundant. As a matter of fact, in the first years after the discovery of America, gold prices collapsed in Europe due to the incredible supply that suddenly started to flood the system. It only recovered value after the Spanish crown put tight controls on its circulation. The rest is well-known history. Imagine if, like diamonds, or even the far less precious aluminum, gold could be easily replicated in a laboratory with the exact chemical structure to the point that no one could distinguish anymore the natural from the synthetic one. In that case, the gold supply will automatically become infinite, and the price will collapse to just its commercial value (if you don’t believe me, just check out what’s going on with diamonds nowadays). Now think about Bitcoin. Imagine if suddenly the ghost of Satoshi Nakamoto hacks the blockchain and removes the 21 million units cap to the number of Bitcoin that can ever be mined. In that situation, it won’t take long for Bitcoin’s price to crash to its commercial value, which won’t be much higher than the cost of electricity plus operational costs to mine it.
Because of assured scarcity and widespread recognition that this will never change, both gold and bitcoin are a store of value.
Based on the current supply estimates, ~201,000 tons of gold mined throughout history and ~53,000 tons of reserves left in the ground, the total value of gold is approximately 16 trillion USD. Concerning Bitcoin, 19.6 million have been mined so far and 1.4m are left for a total market value of 1.37 trillion USD. Yes, there is far more supply of gold left than Bitcoin. However, the “digital gold” is so far only recognized as a store of value by a smaller portion of the population hence the difference from a “fiat currency equivalent” perspective.
What is the total amount of Debt in the world? Currently, that number is an incredible 305 trillion USD. If we picture a giant balance sheet, at the moment gold and bitcoin combined as an asset do only represent 5.6% of the total debt outstanding. Currently, the US officially holds 8,133.46 tons of gold reserves that do have a market value of 602 billion USD. How does that compare with the total outstanding debt? 1.7%.
Now, why do you think the US can afford the luxury of keeping such a low amount of “hard” reserves compared to its total debt? Because USD is a reserve currency and broadly recognized as a reserve currency by everyone in the world. However, similarly to what we discussed above for the supply of gold and bitcoin, what happens to any asset when its total supply starts to significantly inflate? Fewer and fewer people will consider it as a store of value and move their wealth to more reliable ones. Besides gold and bitcoin, there is hardly any other asset at the moment that can be trusted as a store of wealth. Consequently, the dramatic increase in the price of both of them in USD is a big warning sign that the trust in US monetary policy is starting to quickly erode.
How far can this go? When the gold standard was abandoned in 1971, the proportion of US gold reserves against its total debt stood at 2.5%. That means that the value of gold and bitcoin combined can quickly increase 46% from here, and no one should be surprised about that. How much they can go up beyond that will all depend on how many people will still trust debtholders to repay what has been borrowed in fiat money.
Considering the current situation where the #FED and its fellow central bank friends have no intention to reign in on inflation and their respective governments have no intention to reign in on their fiscal deficits, I have strong doubts we will see any chance this trend changes soon.
What about stocks and other assets that still have the power to appreciate as an alternative? On this front, I ask everyone to think carefully about the true value underneath them, in particular, those that lately had a great run because of expectations, speculations, and mania in general. Many companies have been more focused on financially engineering their valuation rather than investing in strengthening their business. Historically speaking, companies of this type always performed very badly in a high inflation environment because under-investing in R&D always translated into higher R&D costs in the future with far less competitive advantage and pricing power to deliver goods and services in a market where other players secured their market share ahead of time.
Needless to say, investing in any form of debt at the current levels is simply stupid because real yields are an assurance there won’t be value preservation of the capital in the future. The FED might well decide the path of Fed Funds rates but beware, the more bond vigilantes realize their wealth is at risk of being eroded in the future, the higher the cost to issue long-term debt. This is why in the current environment, it is almost guaranteed that medium and long-term yields will be much higher in the future across the board, and anyone who says the opposite either never traded a bond, is simply living in an illusion, or has serious problems with math.