Are gold and bitcoin similar assets? In his December 2020 paper entitled “Bitcoin is Exactly Like Gold Except When it Isn’t”, Claude Erb compares and contrasts the following aspects of gold and bitcoin:
- Inflation hedge – how well an asset tracks some measure of inflation/purchasing power.
- Store of value – the ability of an asset to hold its value over long periods.
- Safe haven – how well an asset holds its value during equity market crashes.
- Valuation – intrinsic value of an asset.
Based on a survey of related research and arguments, he concludes that:
- Inflation/purchasing power hedge:
- The real price of gold fluctuates significantly over time, but its real price does not appreciably trend up or down. However, purchasing power of gold relative to the S&P 500 Index trends down.
- Bitcoin does not qualify as an inflation hedge because its real price trends significantly up over its available history. Moreover, purchasing power of bitcoin relative to the S&P 500 Index trends up.
- Purchasing power of bitcoin relative to gold trends up over the available history. Fluctuations in the real price of bitcoin look nothing like those of the real price of gold.
- Store of value: (the greater an asset’s storage risk, the lower the confidence that the asset is a store of value):
- If mined output of gold continues at an annual rate of 1.6% of inventory, gold supply would increase six-fold by 2140 (85% dilution). Without reliable records of past gold mining, it is impossible to estimate the loss rate of gold.
- Miners have discovered 18.6 million of 21 million total bitcoins, with undiscovered bitcoins representing only 11% dilution. An estimated four million bitcoins have been lost due to lost private keys, representing over 20% (deflation) of mined bitcoins. There are likely to be some further losses.
- Safe haven: neither gold nor bitcoin have a convincing record as a safe haven from equity market crashes.
- Valuation:
- To the extent that the golden constant (over a long horizon, gold maintains its purchasing power) is plausible, fair value of gold is about $1,200 an ounce, about 50% lower than the price at publication of this paper.
- To the extent that Metcalfe’s Law (value of a network is proportional to number of users squared) applies to bitcoin, fair value of bitcoin is about $12,000, about 50% lower than the price at publication of this paper.
In summary, while gold arguably has some value as inflation/purchasing power hedge and store of value over a very long sample period, the short bitcoin track record does not support belief that it is inflation hedge, store of value or safe haven.
Cautions regarding conclusions include:
- As noted, the history of bitcoin is miniscule compared to that of gold, making inference about its nature problematic.
- Since the author estimated bitcoin 50% overvalued at $18,000, its value has nearly tripled.
For related research, see results of this search, especially “Bitcoin Displacing Gold?” and “What Kind of Asset Is Bitcoin?”.
