Gold vs. Bitcoin: The Ultimate Competition To Be the World’s Best Money
Did you know the Bitcoin price reached parity with the gold price in April 2017 and never looked back?
Today, buying a single Bitcoin takes over 30 ounces of gold.
Put differently, it takes about 0.032 BTC—3,200,000 satoshis—to buy an ounce of gold.
In the last year, Bitcoin’s market cap grew by over $883 billion—from around $457 billion to about $1.34 trillion today.
Annual gold production is estimated at around 118 million ounces, worth about $254 billion.
The increase in Bitcoin’s market cap last year alone was more than triple the value of global gold production.
If just 10% of that $883 billion increase in Bitcoin’s market cap instead went into gold, it could have rocked the market and sent prices soaring.
With that in mind, and looking at the above charts, it’s not surprising that many have wondered, is Bitcoin demonetizing gold? How should investors position their portfolios?
These are critically important, fundamental questions I will answer.
MicroStrategy founder Michael Saylor thinks gold is an outdated monetary technology compared to Bitcoin. He once said:
“You can cling to gold, but it’s like clinging to your Kodak stock because you like photos instead of buying Apple. Or like Rand McNally maps compared to Google Maps.”
For the first time, gold indeed has a worthy monetary competitor that presents a serious challenge to its status over the long term.
However, I don’t believe the outcome is 100% certain or preordained.
Nobody knows whether gold or Bitcoin will ultimately emerge victorious in the ultimate competition to be the world’s best money.
Below, I’ll describe how I see it playing out.
First, it’s crucial to clarify a fundamental point.
We are talking about a competition to be the world’s best money. So, let’s define what money is.
Money is a good, just like any other in an economy. And it isn’t a complex notion to grasp. It doesn’t require you to understand convoluted math formulas and complicated theories—as the gatekeepers in academia, media, and government mislead many folks into believing.
Understanding money is intuitive and straightforward.
Money is simply something useful for storing and exchanging value. It’s a tool for sending value through time and space. That’s it.
Therefore, I’ll analyze gold and Bitcoin to see which is best suited to send value through time and space.
Today, three monetary goods—fiat currency, gold, and Bitcoin—compete as the best vehicles for storing and exchanging value.
The chart below shows their approximate sizes.
I believe the above chart will be flipped entirely in the future. The only question is whether Bitcoin or gold will reign supreme.
While fiat currency is today’s dominant form of money, it is well on its way to collapse.
I estimate that by around 2030—or perhaps sooner—the collapse of fiat currencies could be complete.
The chart above estimates that about $96 trillion is stored in global fiat currencies. I believe most of that value will migrate to better store-of-value assets, primarily gold and Bitcoin.
That’s why Bitcoin and gold could do exceptionally well in the short and medium term as the fiat currency system crumbles.
However, over the long term—after the fiat currency system has fully collapsed, which I estimate to happen around 2030—I expect an epic competition between Bitcoin and gold as one or the other will necessarily emerge as the world’s dominant form of money. That competition could take many years.
Suppose gold wins. The above chart might look something like this.
If gold emerges as the world’s dominant money, I estimate a gold price of around $16,168 per ounce in purchasing power in today’s dollar.
It also implies a Bitcoin price of $0.
That’s because Bitcoin is purely a monetary good with no industrial or other non-monetary uses. Bitcoin is either useful as money or worthless.
Industrial Use Doesn’t Make a Good Money
A common misconception says money also needs to have some industrial use for it to be good money.
However, that’s like saying a shoe must also be useful as a hammer to be a good shoe.
Many people incorrectly reason that Bitcoin can’t be a good money because it has no industrial or non-monetary utility.
However, industrial use is not needed to make something useful as money. Using something as money—i.e., to store and exchange value—is sufficient for it to be money.
The fact that gold has some industrial use doesn’t give it superior monetary properties. People value gold as money primarily because it’s the one physical commodity most resistant to debasement—not because it’s used in dentistry, electronics, or other industries.
On the contrary, I’d argue that gold’s relatively small industrial uses do not enhance its monetary characteristics. If they did, why aren’t metals with more industrial use—like copper or nickel—more desirable as money?
When it comes to money, I’m only interested in its ability to store and exchange value. I’m not interested in something whose value is hostage to the whims of ever-changing industrial conditions.
This is why industrial use is not a monetary benefit but, in fact, a potential detriment.
Gold would be an even better money without the variation in its supply and demand from its industrial uses, which are unrelated to its use as money.
Further, the competition to be the world’s dominant money is essentially winner-take-all. Anything else would amount to an inefficient barter system, which is why international monetary networks tend to converge on one thing as dominant money at the base layer.
Previously, the dominant base layer money was gold. Today, it’s the US dollar and Treasuries. In the future, I think it will either be Bitcoin or gold.
The current status quo for Bitcoin seems untenable.
Over the long term, I believe Bitcoin will become the dominant form of money or end up at $0 as a superior money—most likely gold—beats it out.
On the other hand, suppose Bitcoin emerges as the world’s dominant money—a megatrend I like to call The Bitcoin Supremacy.
The above chart might look something like the one below.
Even if Bitcoin emerges as the world’s supreme form of money, gold will still have industrial and non-monetary uses, which I estimate comprise around 14% of its total demand. So it won’t be worthless.
If gold were to lose all of its monetary demand to Bitcoin, it would become a pure industrial metal like copper or aluminum. I estimate that monetary demand—to store and exchange value—makes up around 86% of the overall demand for gold. Therefore, if Bitcoin demonetizes gold, I estimate the gold price could drop by 86%.
If The Bitcoin Supremacy occurs—and gold is demonetized and rendered a purely industrial metal—it would imply a gold price of $278 an ounce and a Bitcoin price of $5,171,429 per BTC in purchasing power in today’s dollar.
After the collapse of fiat—which I estimate to be around 2030—nobody knows how long the competition between gold and Bitcoin will last. It could be over quickly or drag on for many years. My guess is that it won’t be over quickly.
I am confident that this competition will happen and there will only be one winner.
Over the long term, billions of people, through trillions of transactions—in other words, the free market—will ultimately decide whether gold or Bitcoin will win.
I am all for free-market competition in money.
I say let the best money win.
In the meantime, I think the stars are aligned for a massive Bitcoin bull market.
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