Bitcoin Reaches Parity With Gold

Tyler Durden's picture

For the first time ever (based on Bloomberg data), Bitcoin is trading at parity with an ounce of gold.

We got close in January...

 

But now it's official...

 

China outflows are accelerating (via the local exchanges), chatter of Mexico being active (as well as Greece, Italy, and France), and the renewed enthusiasm for blockchain (thanks to the ethereum news this week) is all helping drive interest in the virtual currency. Additionally, some of the buying is in anticipation of regulatory changes - The U.S. Securities and Exchange Commission is expected to rule on a proposal for an exchange-traded fund based on the digital currency by March 11.

 

Which raises the question - is Bitcoin as good as gold?

Authored by Stefan Wieler of 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.

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.

 

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froze25's picture

Well missed that one, oh well.

Ghost of PartysOver's picture

Is Bitcoin the last best hope to return to the gold standard?  Heck if I know.  But interesting thought.

tmosley's picture

This shit is driving me nuts. I was a  proponent of Dash for more than a year, but sold mine for silver because I like silver more. Result? Dash up 300% since I sold, silver flat. God damn it.

cossack55's picture

If you always win you have to work for JPM

Paper Boy's picture
Paper Boy (not verified) cossack55 Mar 2, 2017 10:28 AM

Hallelujah!! YES!!

This took far too long to achieve. Bitcoin is far more scarce, versatile and valuable than gold. The length of time this took is a poor reflection on teh intelligence of Earth's investors and NOT on Bitcoin's inherent value!

Ramesees's picture

2 problems with bitcoin are that the "early adopters" control so much of it already and the idea of spending it right now, when everybody's telling you there's hundreds of thousands of upside, seems so painful.

 

The first bitcoin transaction was a guy that got 2 papa john's pizzas in exchange for 10,000 bitcoins.  Imagine how that guy feels right now.

Paper Boy's picture
Paper Boy (not verified) Ramesees Mar 2, 2017 10:35 AM

How is that "a problem"? In a capitalist system, should early adopters be penalized for being smarter than everyone else?

Al Bendova's picture

If you don't hold it (or can't hold it) you don't own it.

Paper Boy's picture
Paper Boy (not verified) Al Bendova Mar 2, 2017 10:42 AM

Yep. Which is why I hold all of muh Bitcoin in muh own wallet and not Online or at some scam exchange.

IronSights on'um's picture

Isn't a bitcoin still an electronic blip created by a man?  and isnt a paper wallet still a piece of paper?  I see value in the block chain but i have a hard time coming around to something electronic that's created by a man.  

This Might Hurt's picture

Precious metals and bitcoin complement each other in a crisis portfolio wonderfully as described in the video below.

http://www.themonetaryreset.com/2017/02/complimentary-precious-metals-an...

nuubee's picture

"...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,"

That is outright disinformation, entirely inaccurate and misleading. That man should be shouted down into the ground for speaking lies like that.

Notveryamused's picture

The other big news is that the SEC is ruling on March 12th on the Bitcoin ETF which is driving speculation this week despite the relatively low likelihood.

Also worth noting is the rise of DASH now $400 million, much better than BTC in terms of privacy and governance, so potential in China esp. if BTC is banned and more aggressive .gov transaction tracking starts.

PSEUDOLOGOI's picture

Yes! absolute disinformation at worst, complete and utter lack of understanding at best.

Spaced Out's picture

Right, it is absolute garbage but for some reason people who can't be bothered to research for themselves fall for it.

Bitcoin has NO "master key". It is a decentralised, peer to peer currency and payment system that cannot be stopped.

 

RedDwarf's picture

Gold, silver, and bitcoin being complimentary and together making a better total monetary system is a thesis I have argued here on ZH before.  Gold and silver for store of wealth.  Bitcoin for transactions and unit of account.

Paper Boy's picture
Paper Boy (not verified) IronSights on'um Mar 2, 2017 10:58 AM

Um, no it is not. It is a cryptographic proof of work. Any fool can produce binary garbage on their computer, not everyone is capable of hashing a block.

MalteseFalcon's picture

I wonder which "money" TPTB favor individuals owning, gold or a "crypto-currency"?

TPTB would like to get everyone prepared for using crypto-currencies, which they would control completely.

How to get crypto-currencies adopted?

Print $ and pump the crypto-currency market up, while suppressing gold.

The only exciting thing about Bitcoin is the price is rising.

Greed uber alles.

Paper Boy's picture
Paper Boy (not verified) MalteseFalcon Mar 2, 2017 12:00 PM

No "they" do not "control" decentralized crypto-currencies you fool.

SILVERGEDDON's picture

Hey, paper bot  - buttcoin is like how cigarettes, alcohol, drugs, sex, and rock'n roll were portrayed back in the day.

Edgy, dangerous, illegal, and therefore, you were cool if you participated.

All it was, was social engineering to make you buy shit, keep LEO's in business, and keep the medical profession busy emptying your wallet while cutting off all your cancerous bits as a result of using bad products.

That - is buttcoin. Get people hooked, and then pull the monetary rug out from under them, and go for total control.

Like zero apr credit cards - music stops, rates go to the moon, and U R Fucked. 

How does it feel to be a pimp for the POTB, dickhead ? 

MalteseFalcon's picture

"No "they" do not "control" decentralized crypto-currencies you fool."

When "they" want Bitcoin to go up, it goes up. 

When "they" want Bitcoin to go down, down it goes.

First mover advantage is bullshit.

Ask Alta Vista and Lycos how they lost out to Google.

Alta Vista is to Google as Bitcoin is to "TBDBankerCoin".

When they dump Bitcoin and promote "TBDBankerCoin", you'll be on board.

And they will own your ass.

Ignatius's picture

Bitcoin's value seems to be primarily based on its ability to transport capital in the dark, not on its long term store-of-value component.

Paper Boy's picture
Paper Boy (not verified) Ignatius Mar 2, 2017 11:05 AM

Bitcoin is an extreme store-of-value. That's what blockchain, public ledger is all about. Bitcoin just wins in every single category. Gold, paper, bonds, currency... nothing can hold a candle to Bitcoin.

Ignatius's picture

We've already seen extreme price volatility due to various government actions, so it's hard to say what its long term prospects are gonna be.  I'm not against bitcoin at all, in fact, I support it as a competing currency.

Not My Real Name's picture

"Bitcoin is an extreme store-of-value."

Since bitcoin was released less than a decade ago, the jury will be out on that specious assertion for a long long time. 

Paper Boy's picture
Paper Boy (not verified) Not My Real Name Mar 2, 2017 12:00 PM

If you wait "decades" to see what will be a winner you will never be an early adopter (winner) in... well, pretty much anything.

Spaced Out's picture

And in that short time it has gone from $0 to $1,250....how much time do you want?

 

SILVERGEDDON's picture

Bitcoin is unicorn farts, Democrat tears, American college girl virgin license, and virtual world furniture store of value.

Ramesees's picture

Hey, to be fair, people love drugs and to people love to launder money.  Seems like there's definitely a stable market for Bitcoin to provide both of those activities.

Ignatius's picture

Sure it can have those uses, but the difference is that "the little guy" has an option that has always been available only to big drug money, government approved  launderers like HSBC, etc., etc..

They hate that because they hate competition.

business as stusual's picture

Fiat currency is also 1s and zeros, just ask the Federal? Reserve? Bank?

breaktwister's picture

That would be most of the fait in existence then.

fredquimby's picture

And the money in your bank account is something more than a blip created by man?

MoonSun's picture

Instead of a precious metal, think of Bitcoin as precious numbers.

mrees999's picture

Bitcoins are electronic tokens that aren't money at all. It's all math. They simply are an accounting system that you can't fake. Inputs...and outputs... each with their own cryptographic private key.  Each one is actually a block of 1 hundred millions addressable units data. Each of those units can also be an accounting system for those that control the private keys.

Inside those units of data - they have very unique properties. In addition to being completely public on the blockchain where the entire world can read them- they are anonymous as we don't know who owns the private keys that can be transferred to somebody else to hold that unique right. So somebody holding bitcoins hold potential future control of those addresses. 

 

What good are those addresses?  You can store a bit of information in them called a 'hash string'. Those have very unique qualities that they can only be created with a special math function that works in only one way. The benefit is you can scan any document into a picture or pdf file or any other kind of computer file - run this hash function for it and get a one-of-a-kind hash string. Any tiny modification to that original pdf or picture (or whatever) file and the hash string is COMPLETELY different. 

 

This allows you the right to put that hash string into the public record where it cannot ever be erased or changed because the bitcoin network is backed by the computing power of about 200,000 (x500) supercomputers combined, and growing. This is called 'tokenization' and you can tokenize about anything including property titles and proof of ownership. Anybody questions it, you can pull out your PDF, run the hash function so they can verify it is the original and nobody can dispute it. It is the TRUST MACHINE.  You've just now tokenized the concept of trust. Want to sell that property title, just scan it in again with the receipt of transfer - and run that version through the hash function as you turn over the property. Now they have an immutable proof of ownership transfer. 

 

How much is tokenized trust worth in a corrupt world?  In my book, much more than the price of gold. People are just walking up to that.

 

fredquimby's picture

Thanks for that. Great update! Cheers!

sober_kiwi's picture

Gold, paper notes, and bitcoin are effectivly all tokens of a promise. The promise to exchange something for something else. The promise is made by man, why does it matter if the token is natural or created, IF these tokens otherwise share the same properties of imutability, fungibility, divisibility, scarcity etc etc

In jest, its not like a token has to be *hippie style* "all natural man"

Ink Pusher's picture

Always returning back to GOLD, or backed with GOLD. Throughout history's repetitive cyclic failures... it always returns to GOLD.

If we actually ran on the premise of " scarcity " Silver would be worth more than GOLD today.

Derivatives are all fabrications. They mean nothing without a base of collateral. Now that the collateralization of debt is being actively sold and traded you can see the conundrum surrounding assignment of true or accurate 'actual valuation'.

Note :

If you or I tried to privately "sell a debt" it's called "racketeering or fraud"...

When financial institutions "sell a debt"  it's called " trading ".

When governments "sell a debt"  it's called "trade settlement  "

When governments print money on a debt they just bought back

It's called suicide.

Mustafa Kemal's picture

Yup, got my bitcoin in my Ledger Nano s, in my hot little hand.

losses mount's picture

Even today I ask myself would I rather one bitcoin or sixty eight troy ounces of silver, and use paypal online. Take a guess at what I'd rather.

Paper Boy's picture
Paper Boy (not verified) losses mount Mar 2, 2017 12:01 PM

Anyone who would even compare "PayPal" to Bitcoin is a total fucking retard. And I have lots of bags of junk silver, I will sell all of it before letting any precious Bitcoin go.

losses mount's picture

I'm not comparing bitcoin to paypal except as a way of making payments online.

The only time I've ever seen bitcoin asked for as a payment method was when I was looking to buy some LSD online. Other than that I don't know of any place to use it. Tell me please what did you last buy with your bitcoin?

Spaced Out's picture

I've bought pc components, a pc, a staircase and a loft-conversion with btc.

Bollockinell's picture

Go to coinbase.com to see some of the merchants accepting Bitcoin. Even Amazon accept it as payment for gift cards which you can then exchange for any products in their catalogue.

mrees999's picture

I own gold, silver, bitcoin, Dash, Ethereum, and many more blockchain based currencies.  I've spent bitcoin in literally dozens of places. I've spent my gold and silver at exactly no places. Nobody accepts gold and silver. Grandpas and Grandmas might trade you something of value, but I can't think of the last time I went into a gold\silver\coin shop and saw somebody younger than about 60.  Young people don't care anymore. They have nothing to relate to.  One is the past, one is the future.

 

Read about how Ethereum will change the world and even the internet itself. (Web3 and Interplanetary File System.) You haven't seen anything yet.

 

SILVERGEDDON's picture

Keep your buttcoin - lets talk about that there useless silver you got. 

With the price currently tanking, I can offer you $5.00 an ounce, shipped to my door.

Take advantage of my offer immediately, before it is a useless relic.  

The Saint's picture
The Saint (not verified) Al Bendova Mar 2, 2017 12:42 PM

Apples and Oranges.  Actually, Apples and Either.

 

Ramesees's picture

Not a problem in a philosophical sense - smart people with balls to take risks ought to be rewarded!  It's just a problem in a practical sense - people won't see as much opportunity to get rich if they think that all/nearly all of the low-hanging fruit has already been picked.  And the opportunity to get rich quickly is a great way to get the blockchain technology adopted and normies to figure out how it works. 

SILVERGEDDON's picture

The early pizza purchase adopter got his ass handed to him for a shit pizza - that ain't too fucking smart. 

debtor of last resort's picture

BTC is like GLD. Just another digital form to keep people from the real stuff.

Done on purpose.