Digital Gold As a Store of Value

The most frequently used narrative is that Bitcoin is the digital gold. A reserve currency or value-storing, anti-inflationary investment. This theory is basing on its scarcity, the limited amount of coins. And also its independence of central banks and governments. However, Bitcoin is seldom used for daily or small payments because transaction fees are high and block times relatively long. (Nor is it used to run smart contracts so far.) But many people believe it will preserve and also increase its value.

 I have studied many Bitcoin price forecasts of essential people like famous analysts, fund managers, and company leaders. (Read: The 9+2 Boldest Bitcoin Price Predictions in 2021.) Various mentioned the gold analogy, assuming that the Bitcoin market capitalization will one day catch up with the capitalization of the gold market. The question is, how big is this market? And also, which gold market is it?

1. Bitcoin Price Forecast by Total Gold Stocks

So, let’s do some homework. By data of the World Gold Council, the “total above-ground stocks” end of 2020 reached 201,296.1 tonnes. That would mean a capitalization of $11,293,325,719,136 (11.3 trillion USD). Bitcoin’s capitalization was only a 10th of that, 1,13 billion on April 10. If we assume Bitcoin’s capitalization will equal gold’s, the price could surge to $600,000, or tenfold. Indeed, some analysts predicted prices around $500,000 this year, based on the “digital gold narrative.”

 2. Bitcoin Price Forecast Based on Liquid Gold Stocks

But there are various purposes of gold holdings. Owner groups may behave differently on the market. Some part of gold is never moved, or in extreme cases only. For example, most central bank reserves are untouched for decades (or raise them slowly). Many jewels never reach the market, like wedding rings or family heirloom, or only once-twice in a century. Coronation jewelry, other museum gold objects, and valuable old historical coins are rarely sold.

Gobal Gold Holdings

• Jewellery: 93,251.1 tonnes, 46.3%
• Private investment: 44,384.4 tonnes, 22.0%
• Official Holdings: 34,210.6 tonnes, 17.0%
• Other: 29,448.0 tonnes, 14.6%
• Below ground reserves: 50,000 tonnes

(World Gold Council)

 Other gold objects, like broken or unused jewels (scrap gold), less-scarce coins, gold in the vaults of producers, traders, processing companies may reach the market easier. Also, some gold can be replaced by cheaper platinum if prices surge.

Bitcoins Lost Forever

In this second case, I consider only the “private investment” amount of gold and the third part of jewelry and “other” holdings as part of the gold market. That may be “liquid gold assets.” (A raw estimation, not based on exact scientific measures.) In this model, the gold market capitalization is 4.8 trillion USD, less than half of the “total above-ground stocks.”

But not all mined Bitcoins are available either. By some analysis, 21 percent of all mined coins so far may be lost forever. (Because of forgotten passwords, deceased owners, destroyed storage units.) So I also reduced Bitcoins’ free float by 21 percent and the capitalization from 1.1T to 894.5B. (Other Bitcoins on accounts of hard-core “hodlers” maybe like gold reserves in central banks, nearly untouchable. But this is another story.)

In this model, the rate of free float gold capitalization/Bitcoin capitalization is 5.3, and with this, my second Bitcoin price forecast is

$323,862.

It seems to be more accurate than case one but is still a very bullish price. (Bitcoin oscillates around $60,000 today.)

3. Bitcoin Price Forecast by Investment-Only Gold Amount

Others may say only the investment-purpose gold (“private investment”) may be available on the market. Industrial use, jewelry doesn’t have much importance here, isn’t part of the liquidity. Jewelry and other assets in vaults may take a very long time to reach the market, even years.

The market value of private gold investments is only $2.49 trillion. About 2.8-times higher than my modified Bitcoin capitalization of $894.5B. The result is a Bitcoin price forecast of $168,548 only. Not a bad price, but many bitcoin fans dream about much more.

Bitcoin As the Digital Gold of the New Generations

ARK Investment’s Cathie Wood said about Bitcoin two weeks ago: “We have just begun. One trillion dollars is nothing compared to where this ultimately will be.” And the analyst of the same company, Yassine Elmandjra, stated:

If we believe bitcoin is a 100 times better version than that, then it’s fairly safe to say that there’s a stark chance that bitcoin captures a lot of gold and market share, and more.

So, Bitcoin may over-perform gold in terms of total market cap. But it can also under-perform it. Two crucial arguments for over-performance in the longer term:

• Cryptocurrency is also a generational phenomenon, and some young people trust more in Bitcoin than gold. More young people may buy Bitcoin in the future than older people bought gold before.
• Inflation expectations jumped in the last months. Real interests stay negative in most countries. More and more people search for some method to preserve the value of their money. Anti-inflationary assets, like gold, Bitcoin, some stocks, real estate, commodities, some collectibles, may stay in a bull market.

Ethereum As Digital Gold? Incredible Forecasts

Many Ethereum fans talk about the “flippening” if in an optimistic mood. That is when Ethereum capitalization (approximately 245 billion today) exceeds Bitcoin capitalization (1132 billion). That event seems far away, but let’s suppose it happens. People are wrong, and the future “digital gold” results to be Ethereum and not Bitcoin.

At which price level can reach Ethereum’s capitalization the value of gold stocks? Let’s see the calculations in the same three cases (the price estimation and how many times gold capitalization is higher than Ether’s):

1. Ethereum Price Forecast by Total Gold Stocks: $97,681 (46.0-fold)

2. Ethereum Price Forecast by Liquid Gold: $41,385 (19.5-fold)

3. Ethereum Price Forecast by Investment-Only Gold Amount: $21,538 (10.1-fold)

And it is not impossible. Because people already use Ethereum as a store of value, as a long-term investment. Read the story of Ethereum 2.0. (For example, here, or also here.)

 There are other methods to calculate the valuation of Bitcoin and other cryptos, like Thermocap, Metcalf’s law, stock-to-flow, stock-to-flow 2, etc. They mainly were indicating a much higher price. But some old-school economists insist the value is zero.

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant, nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, do your proper research or consult your advisors before making any investment or financial or legal decisions.

At the time of writing: I’m long in gold miner stocks, silver, platinum, copper, multinational energy companies, Anglo American, and various cryptocurrencies. Short in the German DAX and the VIX index.

(Photos: Pixabay.com.)