If you're going to call Bitcoin "digital gold," then you should probably understand what actually makes gold a good store of value.
And no, it's not jewelry or industrial applications. It's not even just scarcity or fungibility. It's a few things, and they all relate to each other. I wrote an article on it because I got tired of having to explain this to gold bugs over and over:
(Note that some of the info on Bitcoin is entry-level if you've spent a lot of time in the crypto space. This is primarily aimed at people who don't fully understand bitcoin.)
Given Bitcoin’s “store of value” narrative, it is frequently compared with that other very popular store of value: gold. These comparisons often misunderstand the key similarities and differences between gold and Bitcoin.
Here I’d like to offer a better framework for comparing the two by explaining exactly what makes gold valuable, and then measuring how Bitcoin stacks up.
What Is A Store Of Value (SOV)?
First, a quick note on what a store of value is and is not.
The term is a little subjective, but at a minimum SOVs needs to have some reasonable assurance of retaining purchasing power into the future, and be liquid enough to be exchanged at that future date. (Source)
A store of value is not a guarantee of value, permanence in value, an increase in value by the expected date, or necessarily a capital asset (Pokémon cards can be a store of value) although it may do some of these things.
Even a depreciating or inflationary asset might be considered a SOV depending on the investor’s needs.
For example: though it’s an inflationary asset that loses value over time, the USD may be the ideal store of value for an investor who absolutely requires a minimum 98% of the asset’s value be retained within a year (depending on inflation) for a future investment or expense, and be instantly liquid at the time of exchange. For that investor with that goal, land or gold is not a good SOV.
“The future” is a very broad term for an investor. Critics of Bitcoin often accuse its volatility of undermining its utility as a SOV, but what makes something a SOV depends heavily on the time horizon in question. Anyone who bought Bitcoin even at the height of the 2017 bull run, and held on, is currently enjoying Bitcoin as a store of value over 3 years later.
Simply put: if an investor’s time horizon goals for an SOV are sufficiently long, then short-term volatility is of minimal concern.
For Bitcoin, the time horizon for a safe SOV currently seems to be somewhere in the neighborhood of 3–4 years to ride its algorithm-induced bear / bull market cycles.
With only a 12 year track record, we have a ways to go before we can determine how consistent that result will be.
For comparison, anyone who bought gold at its peak in 2011 had to wait almost 9 years to see a positive return, as of the time of this writing.
So, assuming a sufficiently long time horizon of at least ten years, what actually makes gold a store of value?
Anyone who bought gold in September 2011 had to wait over 9 years for their store of value to recover.
What Makes Gold Valuable?
Gold’s properties of corrosion resistance, industrial use, aesthetic appeal and multi-thousand year history as money are often cited as its inherent SOV. But how can we translate those qualities into fundamental properties to use as a measuring stick against other proposed SOVs like Bitcoin?
All of gold’s inherently valuable qualities can be placed in one of the following categories:
Gold is scarce
Gold is fungible
Gold is durable
Gold is portable
Gold is divisible
Gold is recognizable
Gold has non-money utility
Gold has history
Note that I am not adding a category for gold’s oft-cited aesthetic qualities as part of its SOV proposition, namely because they can replicated by worthless materials. Lead spray-painted with convincing gold paint captures nearly all of the aesthetic beauty of real gold and yet none of its value.
Gold can be fashioned into beautiful forms and people will pay a premium for that beauty, but the art and the gold itself are different value propositions.
There is a limit to the amount of accessible gold on Earth and extracting new supply is slow and expensive. This is unlikely to change.
Some amount of gold has been lost in shipwrecks, in wedding rings slipped off fingers at the beach, or in tombs we may never find, and is therefore locked out of circulating supply. But supply limitations alone aren’t enough: the SOV needs to be sufficiently rare relative to current and future demand to ensure ongoing value.
Humans have been valuing gold for thousands of years, and one can reasonably assume that gold will retain some large degree of its current value in another thousand years.
So, scarcity is a value judgment based on supply constraint vs. expected demand in a chosen time frame.
The ability to exchange 1 unit of gold for another identical unit of gold without impacting the stored value is necessary for its proposition as a SOV.
Even when molded into forms that alter is aesthetic value positively or negatively, reshaping the gold into a brick obliterates any impact of that previous shape and returns it to the current market price.
1 ounce of gold always equals 1 other ounce of gold.
A good SOV needs a long shelf-life. Pure gold does not react to oxygen, can be reforged and/or merged with other gold, and requires large volumes of harsh chemicals to dissolve into a solution. The gold an investor buys today is almost guaranteed to be in the same stated one thousand years from now, ensuring its SOV properties will not be lost by the transit of time.
A good SOV needs some degree of mobility. This is hardly unique, but it is relevant. Land — another popular SOV — does not have this quality, and so we attach land value to a highly-portable document. Physical custody of land can never been transported.
There are no “squatter’s rights” with gold. Physical custody is physical custody.
Highly divisible SOVs have more utility both in their ability to be used for smaller purchases and easier portability. The smallest unit of gold is limited only by what tools we use to measure it (the naked eye for most people) and what minimum amount a buyer is willing to exchange.
No SOV is truly useful unless its authenticity can be verified. Gold can be chemically tested for purity, although this does require some specialized tools to do correctly.
Verifying gold requires — at a minimum — a black rubbing stone and nitric acid. Trustlessly proving this to a buyer means demonstrating the process in front of them. Otherwise, a certificate of authenticity from a trusted third party is required.
Price history establishes credibility. The more people trust a SOVs longevity, the greater its value proposition.
An asset with a price history going back ten years is more credible than an asset that just hit the market last week. Gold has been used in currency going back at least as far as 600 B.C.E., and was likely used as a medium of exchange long before that.
Probably least important to our analysis is gold’s usefulness outside of money or SOV.
Gold has conductive properties, and its resistance to corrosion makes it useful for many industrial applications. Gold investors often argue that gold’s industrial / technological / biomedical utility ensure its value will never be zero, and while that is true, only about 8% of gold’s demand is for technological / industrial use.
8% of current value isn’t exactly eye-popping.
So How Does Bitcoin Stack Up?
Most of Bitcoin’s supply has already been mined. There are only about 2.3 million more coins to be added.
SCARCITY: Favors Bitcoin
A mathematically-provable supply cap makes Bitcoin both literally and practically rarer than gold. Bitcoin has a maximum supply set to 21 million coins that will be reached in the year 2140, and most of the available supply has already been produced.
New sources of gold will likely continue to be accessible long after 2140.
Like gold, much bitcoin is lost, forever locked away in wallets that owners cannot access, probably around 20% according to Chainalysis.
At the current block reward of 6.25 Bitcoin per block, an average of 900 new Bitcoins are produced every day. Some time around May 13, 2024, that amount will drop to 450 instantly. Gold’s rate of production is steady but not as predictable as Bitcoin, and can change with technological or geological discoveries.
A note of caution: Bitcoin is software, and software sees updates. There is no guarantee that Bitcoin’s supply rate or supply cap will not be changed. However, this action would likely be very contentious and result in a hard fork — a split in the blockchain that results in a new blockchain. This has happened multiple times in the past. So far, these new blockchains do not see as much investment or as many users as the parent chain.
Like gold, 1 Bitcoin is always tradeable for another Bitcoin. No Bitcoin is fundamentally unique relative to another one.
(There are ‘tainted’ coins that are tarnished by an unsavory transaction history, and centralized exchanges may block those coins from being spent, but the rise of decentralized exchanges means even those tainted coins will probably remain liquid.)
DURABILITY: Subjective, but favoring Bitcoin
Unlike gold, Bitcoin does not reside in any one location. Rather, every Bitcoin exists entirely and solely on its parent blockchain, which is distributed across over 10,000 nodes all over the globe (including up in orbit!)
So long as even one of these nodes survives, no Bitcoin can be ‘destroyed.’ You can set fire to your hardware wallet and your Bitcoin still exists on the network. Any Bitcoin an investor owns is totally inseparable from the network itself.
Gold cannot be destroyed, but it can be chemically dispersed to such an extent that recovery is nearly impossible (although that is an unrealistic scenario for the average gold investor.)
Both gold and Bitcoin can be lost.
PORTABILITY: Favors Bitcoin
Here Bitcoin blows gold away.
Gold being a physical medium requires physical transport. Investors may create “paper gold” and trade deeds to gold to increase portability, but this cannot replace the trustless value of physical custody. If an investor needs to get a lot of gold out of a country, they are in for quite an expensive hurdle.
Meanwhile, anyone who controls the private keys to a Bitcoin wallet has pure “physical” custody, and it can be “moved” instantly, anywhere in the world, for a nominal fee.
Private keys can be written on a piece of paper or even memorized and billions of dollars can transported across oceans in someone’s pocket, with or without internet access.
DIVISIBILITY: Favors Bitcoin
The smallest divisible unit of Bitcoin (a Satoshi) represents a single “unit” of Bitcoin split to 8 decimal places: 0.00000001. Even if Bitcoin were to reach an astronomical evaluation of $10 million USD, 1 Satoshi would only be worth 0.10 USD. As gold increases in value, exchanging very small dollar amounts becomes challenging. To achieve sub-dollar amounts, gold must being merged into an alloy or be exchanged as fine granules.
Adding 10 cents to your bitcoin transaction is as trivial as clicking a number on a screen. Adding precisely 10 cents to your gold transaction requires a little more effort.
Would an investor ever actually care that they can’t realistically purchase a cup of coffee with gold? After all, we’re talking about a store of value, not a currency, right?
Extreme divisibility is one feature that allows an extremely rare SOV to function as a currency if it needs to. Bitcoin is not the most efficient or effective form of digital cash, but its divisibility allows it to perform that task if needed.
If you have to use your store of value to buy a cup of coffee, you’ll have an easier time using Bitcoin than gold.
RECOGNIZABILITY: Favors Bitcoin
Every Bitcoin is verified by the entire network; a transaction buried at least 6 blocks into the blockchain is immutably secure and ownership is mathematically proven via public-key cryptography. There is no such thing as “fake Bitcoin,” and so long as a wallet is virus-free and a user does not accept transactions of less than 6 blocks, your Bitcoin is verified.
Lead electroplated with gold may fool even a buyer with access to a black rubbing stone and nitric acid, and a buyer without those tools has no means of trustless verification whatsoever.
Besides, I’m not sure we want people walking around with bottles of nitric acid in their pocket.
HISTORY: Favors Gold
The first known gold alloy coin was produced in Lydia, western Turkey, over 2,500 years ago. It shows up in jewelry as far back as 4,500 B.C.E.
Clearly, Bitcoin has a ways to go before it even comes close to approaching gold’s trust in society, and its software-based nature means it may change in ways that users ultimately do not like.
That said, each year of Bitcoin’s continued successful operation lends that much more credibility to the network.
NON-MONETARY UTILITY: Favors Gold
Here is where gold can accomplish something Bitcoin truly cannot. No Bitcoin can be used in a dental implant or jewelry. While only 8% of gold may be used for industrial purposes, that still counts as a price floor; if everyone in the world magically decided to stop using gold as a SOV, gold would still be worth something. That’s not much, but it’s not 0.
The same cannot be said for Bitcoin.
Distilling gold’s inherent properties to useful measurements of a store of value offers insights we can use to measure other SOVs.
Out of eight categories, Bitcoin easily proves demonstrably more useful in four important areas, and is at least as equally fungible and durable as gold.
Whereas gold has historical and non-monetary properties that are more useful than Bitcoin, overall, Bitcoin offers major technological improvements over gold’s traditional SOV qualities, with some added risk.