Is A Bitcoin "As Good As Gold"?

Tyler Durden's picture

Submitted by Stefan Wieler via GoldMoney.com,

Introduction

 

The price of Bitcoin seems to have exceeded the price of gold briefly for the first time this week; however, this comparison is completely arbitrary.

 

Gold is measured in weight, while Bitcoin, much like currency, is an abstract form of money and can only be measured in units of itself. One Bitcoin is worth a lot more than 1 gram of gold, but a lot less than 1 tonne. Despite Bitcoin’s stellar performance in 2016, the size and depth of the cryptocurrency market is dwarfed by the $7 trillion gold market.

 

Gold remains the only true global money with a size and volatility comparable to that of fiat currency.

 

View the entire Research Piece as a PDF here...

Bitcoin – or cryptocurrency itself – is the most exciting monetary experiment in modern times.

Unlike fiat currency, it can’t just be printed, and it mimics the scarcity properties of gold in that it needs an enormous amount of energy to create one coin. The energy-proof of value is what links gold to the primary industries and allows it to maintain its purchasing power over incredibly long periods of time. Without it, any form of money will inevitably be corrupted over time and decay. Bitcoin has some of the same energy-proof of value that makes gold far superior to fiat currency, which can be created with the stroke of a key. Bitcoin, also like gold, is a global currency that may be universally accepted in the future. Even USD can’t make that claim.

Bitcoin has some qualities that are not shared by any other form of money, most notably the potential total anonymity in electronic transactions; however, some might feel that aspect that may prevent the universal adoption of Bitcoin as money. Today, the global stock of Bitcoin is just $20 billion (despite its price rally) and its transaction volume is tiny, even when compared to more exotic currencies. That said, as the adoption of Bitcoin increases, governments may no longer be happy with the fact that it can be used for anonymous transactions and may prevent legitimate businesses from accepting it as money if they see this as a threat. Only time will tell. In the meantime, Bitcoin remains the only alternative to gold (and other precious metals) for savers to escape the built-in decay function of fiat currency otherwise known as inflation.

Bitcoin is currently in the limelight because it has apparently exceeded the price of gold for the first time on some exchanges (although at the time of writing, Bloomberg still shows an average price of Bitcoin hasn’t crossed the gold price yet, but it seems just a question of time). We have no doubt that this will lead to a barrage of headlines in online media, and some mainstream outlets will jump on the bandwagon as well. After all, they already widely reported on a claim made by the Winklevoss brothers in mid-2016 that Bitcoin’s volatility had apparently fallen below the volatility of gold, and thus Bitcoin had become “better at being gold than gold”. We rebutted this claim and surely Bitcoin’s volatility shot back up to 100% shortly thereafter.

Bitcoin has rallied almost USD500 last year and USD100 in the first two days of 2017 alone. At the time of writing, 1 Bitcoin was trading at USD1,135, while 1 oz of gold was trading at USD1,164. To some, it may seem like Bitcoin is about to be more valuable than gold, and though this is of course conceptually incorrect, it probably won’t stop the media pundits from publishing the headline anyway.

Gold and elements can be measured by weight (oz, g, kg, t). Mass and weight are the measuring units endowed by nature. Fiat currencies, or any other abstract commodity or money (including Bitcoin), cannot be measured that way. An abstraction can only be measured in units of itself. Gold and silver are therefore the only form of money today that are traded in weight. Fiat currency on the other hand cannot be measured by anything other than other currency, at least since Nixon ended the convertibility to gold in 1971. In that respect, Bitcoin falls into the same category.

Thus, when comparing units of gold to units of Bitcoin, one must first define what unit it is measured against. Is it grams (currently USD37/g), kilograms (USD37,000/kg) or tonnes (USD 37 million/tonne)? Or are we measuring it in the rather obscure measure of troy ounce (USD1,157/ozt), which, apart from exchange traded metals, is not used for anything else?

Hence comparing the price of 1 Bitcoin vs 1 troy ounce of gold is a little bit like comparing the shares of Seaboard Corp. (USD4,179 per share) to those of Apple Inc. (USD116 per share) and concluding that Seaboard Corp. is worth 35 times as much. Clearly, measured accurately by market cap, Apple is the largest and most valuable company in the world and worth 126 times as much as Seaboard Corp.

The same basic principle applies to money. Combined above-ground gold stocks are currently worth around $7 trillion. As we noted last year, that is more than all banknotes in circulation of all currencies combined (see Eliminating cash will also eliminate the checks and balances on banking policy and practice, February 22, 2016), and it certainly dwarfs the market cap of Bitcoin at around $18 billion. In fact, all crypto-currencies combined (we count 710) have a market cap of just $21 billion (see Figure 2).

bitcoin market size full

There is another obvious obstacle when comparing Bitcoin with gold: Volatility. High volatility is often pointed out against gold being used as medium of exchange and store of value. We will look the volatility of gold in more detail in an upcoming report, but in a nutshell, we find the volatility of gold (measured as standard deviation) is roughly comparable with currency, and gold has proven to be a much better store of value than any currency over the long run - even when interest is taken into account. Bitcoin’s volatility significantly exceeds that of both gold and currency. At times, Bitcoin’s volatility declines for a short period and can even approach the volatilities of gold and currency, but tends to shoot up violently shortly thereafter.

Bitcoin major currencies

However, standard deviation should not be confused with a measure of risk. The standard deviation quantifies the dispersion of returns; what it does not do is distinguish whether that dispersion comes from upward or downward moves.

For example, an asset that has a 1% return every second day and 0% return every other day would exhibit an annualized standard deviation of 8%. An asset that has a -1% performance every second day and 0% every other day exhibits the same standard deviation. In an asset management context, the two assets may have the same risk. In fact, the negatively performing asset might reduce risk in a portfolio if it is negatively correlated to the other assets. But for a saver, the first asset is clearly less risky.

Hence, instead of measuring volatility as standard deviation, we can measure just the downside deviation. This provides a better idea of the risks of money. How does this look for Bitcoin? Bitcoin’s downside deviation is still several orders of magnitude higher than that of gold or currency. Over the past two years, Bitcoin experienced a downside deviation of >45%. Since the beginning of data in 2010, it was >100%.

bitcoin deviation

The volatility – or to be precise, the downside risk – makes it difficult for Bitcoin to be more widely adopted as money. What speaks for Bitcoin is that it has shown stellar performance over its short lifespan, but this stellar performance comes with considerable downside risk. A merchant accepting Bitcoin as payment is exposed to this downside risk unless he instantly exchanges Bitcoins back to currency following the transaction. Even though a cycle takes about 6 minutes in theory, exchanging Bitcoin to currency actually takes about one hour to confirm the transaction and another hour to confirm the price, during which at the very least the merchant is exposed to the downside volatility. Holding Bitcoins permanently might hold huge upside, but that also comes with intolerable downside risk for a merchant. After all, merchants should spend their time and energy with what they are best at (selling goods) rather than trading currencies and Bitcoin.

Another claim we don’t agree with is that Bitcoin is as free of counter-party risk as gold. What we have seen with Ethereum, another nascent cryptocurrency, is that these virtual currencies ultimately have a master key. With Ethereum, that key is controlled by a council that decides its future inflation rate; with Bitcoin, that key is controlled by Gavin Andresen, an engineer based in Massachusetts. There’s no guarantee that they won’t change the source code for the Bitcoin blockchain in the future, and when you “own” a Bitcoin you simply refer to the blockchain - a distributed ledger that tells you what and how much you own. In this regard, we don’t agree that Bitcoin does not have custodial or counter-party risk; the blockchain itself is the fat tail.

This means that for now, gold remains the only global currency in which individuals and corporations can transact with no time delay, with price volatility comparable to that of major currencies yet without counter-party risk, and one that has been proven as a store of value for thousands of years.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
bugs_'s picture

Will Central Banks and their Government puppets come to hate bitcoin more than gold?

Raffie's picture

GOLD/SILVER 4TW......

 

How expected.

Croesus's picture

If computers depend on Gold to run (in the form of plated terminals, etc.), and Bitcoin depends on computers to run...THEN:

Wouldn't Bitcoin technically be dependent on Gold to run?

If that's true, then BTC cannot possibly have more real value than Gold.

Draybin Deffercon III's picture

ASICs do not require gold to work Croesus.

Croesus's picture

The entire architecture of the internet is dependent on PM's. No idea wtf an ASIC is, but if BTC transacts online, stores on servers, etc., at some point, it needs the "Precious".

Carry on!

Draybin Deffercon III's picture

The gold plating on most electronics is mainly to prevent corrosion and oxidization.  It's more of a gimmick when you see it on USB, audio cables, etc..

Lore's picture

Look up the definition of a Pyramid. To me, it's trivially obvious that BTC is a self-inflating Pyramid! It only works as long as it absorbs more currency than it disgorges.  That's why it's a magnet for money launderers, because it recognizes no jurisdiction.  Who are you going to string up from a lamppost if BTC gets taken down at some point?

Draybin Deffercon III's picture

Again, you have no clue what you are talking about.  I am asking you a pointed question here.. what will "take down" Bitcoin?  And also AGAIN, there is no such thing as "money laundering"!!

FFS... is there anything else I can repeat to you people for the Nth time??

Lore's picture

Why are you being evasive?  BTC is an arbitrary unit of measure with a unique identifier.  THAT'S ALL.  All I have to do as some government control freak is lay down some laws and start prosecuting people, or create another alternative version of BTC and ordain that "This is the CORRECT one," and all that supposed "wealth" that you have tied up in the previous blockchain are jeopardized.  I refuse to respect any "store of value" that has nothing to back it beyond diktat, because it hasn't solved the underlying problem of currency. Far as I'm concerned, you're just another huckster trying to suck people into a different flavor of con, and if you don't believe in money laundering, you must suffer from some kind of mental block. I'm taking part in an investigation tied to the local real estate industry. Money laundering abounds. 

techpriest's picture

This was my take as well. One can certainly speculate on how popular Bitcoin will get (more money in = larger per-coin price), but it really isn't anything more than a fancy way to make your own currency. That's why there are hundreds of flavors of bitcoin already on coinmarketcap.com.

Also, based on what I'm reading about Ethereum, it really is poised to be a Bitcoin 2.0 because of the larger number of features built into it (BTC is a block of arbitrary value, wheras ETH is an extensible, multi-purpose contract blockchain).

When a few speculators do in fact get rich, it will be humorous to see if they can really escape the tax man. Usually when you buy $10k+ items with no cold money changing hands, or soon enough, you are clearly living $20-30k above your means with no credit cards, it attracts the tax man.

Lore's picture

Yup.  Draybin / Flake promotes this thing with religious zeal because he knows damn well that the con only works as long as you can suck in others.  The moment that stops, the machine stops.  The world has too much sleaze already.  Why feed the beast? 

Pinch's picture

Bitcoin is junk. Sad. Gold is tremendous, bigly.

Mustafa Kemal's picture

"Bitcoin is junk."

This is music to my ears.

In addition to Au, Ag, and Pb, we will continue to trickle stack BTC. The more I hear contempt for it the better.

jaxville's picture

It is hard for them to catch you if you settle in cash.  Credit and debit cards document your spending. Taking your "bitcoin" winnings out of the exchange will leave a paper trail (or it's electronic equivalent).

 

Silver Glock's picture

There are plenty of prepaid credit cards with a random name you can get for Bitcoin, without ID verification, as long as you stay under $USD 2.5k / card

And you can order gold with BTC, no ID required as long as your orders are < $USD 10k

 

play the KYC game...

Huckleberry Pie's picture

From a TA view, is this the making of a multi-year cup-n-handle?

stacking12321's picture

fonestar is 100% correct about the so-called crime of "money laundering", it is made-up bullshit from TPTB.

if you are a slave, you will believe them when they tell you that they have the right to track your money and what you do with it.

if you are a man who stands up for himself, you recognize that your money is your own, and no one else's business where you spend it and where you move it to.

so, which one are you, a man or a slave?

Notveryamused's picture

Unfortunately our world is so digital that until demand side forces are overwhelming, gold is an incredibly weak and easy to manipulate currency and will only produce real returns when SHTF.

Meanwhile BTC will continue to appreciate as capital controls, the war on cash and onerous taxes increase. With those BTC profits you can continually rebalance your portfolio into price suppressed gold.

BTC is relatively young and vulnerable to a technical flaw or a superior competitor particularly with regard to privacy but this is cheap to hedge against.

Will there be more capital controls, war on cash and tax hikes? How can someone pay me money that I can move internationally privately in minutes... There's a market for the best & most popular form of digital money just like the best form of physical money.

piceridu's picture

When will you digital jockeys ever understand that gold isn't an investment...it's money/insurance that never expires.

Notveryamused's picture

Lol. You're funny. I know gold is long term store of value. I'm sure you're aware though given the state of the world it's probably the best time to have ADDITIONAL gold in your portfolio because SHTF time is close at hand. I'm sure you also know the paper gold price is manipulated and suppressed by the major banks until such time as physical demand overwhelms them, hence you are able to buy at a DISCOUNT. If you want to accumulate more of the shiny stuff you should buy something that isn't majority traded via a digital proxy & that can't be easily inflated 100-1 because the item itself exists digitally and so is easy to take delivery of... As limited digital currencies appreciate you can buy more gold whether you want just a store of value/insurance or whether you grasp that at this point in fiat history, SHTF Is near and thus so is a rapid upwards value readjustment hence making gold a good additional INVESTMENT too

Lore's picture

We agree only to the extent that applicability of the term 'money laundering' is a matter of context and perspective.  To say that "It doesn't exist" is stupid and won't get the accused very far in a courtroom.  

We live in nations of laws. Misuse of law and rampant government overreach are no excuse to disregard the fundamental importance of rule of law in order for different people to live together in relative harmony.  We need GOOD laws, HONEST money and LIMITED government not hijacked by psychopaths.  That IMO points to the fundamental flaw not addressed by this article: CRYPTOCURRENCY IS MERELY DATA STORAGE, easily hijacked by the rule-changers. It will happen. Watch.

VinceFostersGhost's picture

 

 

Borrowing a line from the Godfather.....

 

Why take a chance?

Lore's picture

That wouldn't be rational.  We've done our research, our conclusions differ, and at different times and in different ways, one or the other of us will be proven right. Aren't markets beautiful? 

Bay of Pigs's picture

What will take it down?

As explained many times, without Chinese trade ( money laundering) accounting for 97-98% of ALL BTC trade, this speculative bubble collapses.

Draybin Deffercon III's picture

Again, this will not stop Bitcoin.

Again, there is no such thing as money laundering.

Yen Cross's picture

   Good Lord, you're such a fucking retard.

    It's about regulation you fucking idiot!  Do yourself a favor and sell your shitcoins for something tangible.

   Buy some 24-k usb sticks.

 

Draybin Deffercon III's picture

No IT IS NOT about regulation you dumb fuck!!!

How can I spell this any more simply, slowly and clearly for a simpleton????

BITCOIN IS THE DEATH OF YOUR TAXATION SYSTEM. BITCOIN IS THE DEATH OF YOUR GOVERNMENT'S CONTROL OVER MONEY. IF YOUR GOVERNMENT REALLY WANTS TO TAKE ON A FIGHT AGAINST BITCOIN YOUR GOVERNMENT WILL DIE TOO!

Mustafa Kemal's picture

"Again, there is no such thing as money laundering."

Well, I dont get that.  It seems money laundering has been very popular for a very long time. The CIA is very good at it.

kochevnik's picture

Bubbles are based upon debasement.  Currency is debased in real estate bubbles.  Tulips debase themselves as they multiply.  BTC cannot debase.  You are promulgating myths

Money laundering stems from bureaucrats too lazy or ineffectual to prese cute crimes, so instead they steal property.  You are implicitly advocating fascism using that term

Yen Cross's picture

  Yes. ^ The rise in BTC is a giant black eye for the PBoC.

   The Yuan is a fucking farce backed by a [stated] mountain of debt, at least 50% larger than the United States, with X4 MOAR serfs, to service.

  The rats are crawling everywhere, but there's no cheese.

Bay of Pigs's picture

Thank you. Exactly my point. Not sure why people don't understand what we're saying.

Yen Cross's picture

 I've learned so much from you over the years BoP.  Your back is covered ;-)

heuvosYbacon's picture

Come on now, Lore must have SOME clue. I understood him perfectly well, and I don't know him from Adam. Show some intellectual resepct, if you want some yourself. It seems to me that you are really struggling to accept the facts about the world in which bitcoin finds itself.

A lack of electricty will take down bitcoin. So will severed interweb cables. So will laws that make it hugely unattractive to have anything to do with bitcoin. The idea that bitcoin is impossible to stop flies in the face of soveriegn fiat currencies. One could make the same argument for gold and silver coins, that they can never be replaced by paper money. Yet there are many places where gold and silver have been driven out of the market by prohibitive laws. Fiat currency should strike you as the smoking gun to prove that one can, in fact, legislate currency controls.

As for there not being such a thing as money laundering, I'm not sure what point you are trying to make. I might agree that money laundering laws have no inherent nobility about them, and that one can't really stop money laundering without destroying all commerce, but that speask to the futility of anti-money laundering laws, not to the absence of money laundering.

Money laundering is fabricating market transactions in order to hide the true origins of revenues. It is done for a wide variety of reasons, including privacy, investor fraud and tax evasion. Rather than repeat yourself, perhaps try and articulate your ideas with more care. I look forward to it.

 

auricle's picture

What will take down bitcoin is when governments make online and physical exchanges illegal. Nothing can take down the actual program, but they can prevent conversion of bank notes to bitcoin and back. Even if gold and silver were made illegal, I would still accept silver payment for a car I'm selling. I wouldn't accept bitcoins that I cannot currently redeem. In the end gold and silver are tangible and that is the simple advantage. 

RedBaron616's picture

The Fed, perhaps. Governments after taxing those transactions.

Golden Phoenix's picture

'Money laundering' is a legal term invented by banks and enshrined into law by their lobbyists to describe and entrap anyone escaping their fee structure.

StackShinyStuff's picture

Enshrined into law being the key phrase...

IrrationalScientist's picture

Characterizing BTC as a pyramid seems like an emotional stretch. But let's follow your recommendation and look up the definition of what consitutes a pyramid scheme:

pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.

This is the Wikipedia definition, I'm sure other sources would agree.

With BTC there is no incentive in "recruiting" others for promises of benefits. I know it might be difficult to accept but for all intents and purposes BTC is a currency. Yes, it is volatile. Not enough market cap and still not mainstream. But volatility could stabilize as market cap increases.

There is an interesting article that presents this better than I would.

BTC is not meant to replace fiat currencies nor precious metals. It does however bring it own unique characteristics that could justify you considering including it in your portfolio. The technical architecture makes it extremely difficult for any government to control or stop it. Think Internet censorship and how well it has worked so far.

 

 

wulf's picture

ASICs will be raped by government owned quantum computers. Actually, you don't even need quantum computing to destroy bitcoin. If/when banks or governments feel that bitcoin may be a threat, they could assemble easily a computing system powerful enough to terminate bitcoin for a long time by using a 51% attack, or by flooding the network with transactions, or by denial of service, whatever. A handful of chinese miners couldn't do anything to fight that.

Once quantum computing or any other new computing system owned by government entities is out, bitcoin's cryptography will be as obsolete as the enigma machine.

Seriously, anyone who thinks bitcoin will survive the test of time like gold is out of his mind. It's just a game... or a cult. lol

Draybin Deffercon III's picture

You know, throwing the term "quantum computing" out there doesn't really mean you have a fucking clue right? Bitcoin will be worth fortunes in a few years and your opinions will still be worth nothing.

 

wulf's picture

Sorry. i'd rather put my money on useful things. But, congratulations for your effort.

kochevnik's picture

BTC encryption can be upgraded. Therefore, your entire pretense is invalid and BTC will persist barring unforseen developments in maths

The central planners's picture

Another issue its that blockchain register all transacctions in a cuople of years regular computer will be unable to process that tonage of data.

The central planners's picture

In what part i am wrong. All transactions are recorded, right? And by the time the file size of blockchain will grow and grow to the point that it will be terabytes of data, Right? So regular computers will process all that data?

Draybin Deffercon III's picture

Yes, it is trivial for any modern computer to deal with a few GB. 

JustUsChickensHere's picture

You are a bit behind in your technology appreciation.

GigaByte file systems and drives are trivial - even for Windows.

But try Linux - the (now) default file system is a thing called Ext4 ....max capacity 1Exabyte ... details: https://en.wikipedia.org/wiki/Ext4

and that is not the biggest file system available.

Layer your file system on top of the LVM device system and you concatenate physical drives (lots of them) into that file system.. the physical drive size is not the limit.

Disk space is not a problem for Bitcoin - even with commodity based hardware.

 

 

Golden Phoenix's picture

I dunno - when my client gets rudely shut down such as when Microsoft suddenly reboots my pc for an unscheduled upgrade it takes me a few days to redownload and resynch the blockchain.

The blockchain growing exponentially is what I consider to be one of the few legitimate problems for individual users. It's a concern that gets larger every day. Of course someone using an exchange wouldn't have such issues but they have infamous issues of their own.

On the other hand if Moore's Law continues to apply to storage and bandwidth improvements may keep pace.

heuvosYbacon's picture

As opposed to non factually incorrect.