June 12, 2020 |James Messi
Throughout the crypto space, there is a widely held view that Bitcoin is a better source of value that Gold.
Gold supply crisis
Just like any good, service, or commodity, the price is determined by the forces of supply and demand. The supply of gold is half of the pricing equation. Too much supply and the price will be artificially low and too little supply and the price will be artificially high. This rule of basic economics is true of all asset classes, some to a larger extent than others.
A component of the price of gold that often overlooked in the supply of gold. Most focus on the demand for gold and how that changes based on macroeconomic events. Its typically believed that bad macroeconomic performance or crises lead to a higher gold price as people move their savings out of risky investments and into ‘safe haven’ assets. It is often assumed that the supply of gold stays mostly constant. But, I firmly believe that a number of upcoming events and inevitabilities will drastically change this perception.
Meteor mining can increase gold supplies
Just a few years ago a drone was landed on a moving asteroid, which at one point seemed impossible. It was seen as a huge development in space flight but when I heard about it I saw it as a huge development in commodities. As technology develops it’ll be easier to land on asteroids as well as cheaper to do so. Its widely agreed that technology will develop enough to allow resource harvesting of asteroids. This may seem obscure and unimportant but it’s worth noting that these asteroids have been found to hold large quantities of precious metals such as gold and silver. A notable example is the asteroid ‘Anteros’ which has an estimated precious metal value of $5,570 Billion.
Anteros has a number of prominent metals it’s not so prominent in gold. Others are presumed to have more gold. The main principle point is that if asteroids can be mined efficiently and profitably then the Earth gold supply is essentially unlimited. Of course, this isn’t an immediate issue and it will take a long time for technology to reach a level where this is profitable but when it becomes common, expect the price to fall dramatically with ever newly discovered asteroid.
Gold from the ocean
The ocean holds many mysteries, one of the major ones is the copious amounts of gold that lie at the bottom of the sea. Large gold veins have been seen on the floor of the ocean. The question is therefore not whether they exist but is it profitable to access them. If it is, mining companies will start to take advantage of the opportunities. Estimates are still unreliable on the whole, but the uncertainty of quantity remains an issue. The ocean makes up a majority of the surface of the world so it may be that once ocean mining becomes widespread, the gold supply increases dramatically.
As well as there being large amounts of gold on the seafloor, there are also trace amounts of gold in the water itself. Admittedly small, if applied on a large scale a good return could be made by companies who are efficient enough to filter the gold out of the ocean. However, some recent estimates shine considerable doubt on the level of gold in the ocean. One estimate suggests that in the entire ocean (1.3Bn metric tons) there could be as little as 13 grams of gold. Other estimates vary so it is not conclusive as to whether finding dissolved gold in the ocean’s water is a profitable endeavor.
Caution over China’s supply figures
A lot of the economic figures from China’s Communist Party are widely disputed amongst economists. From GDP numbers to currency levels and more frequently, the total quantity of gold that they currently hold.
South Africa used to be the world’s largest gold producer but in 2007 it was overtaken by China since then it’s gold production has continued to grow and it produces 100 tons more than it’s next closest rival Australia (by 2016 figures). In addition, China doesn’t export domestic gold production. It does export gold but not that which has been mined inside of China. China has mined over 6,000 tonnes which is way above its declared 1,800 tonnes.
To increase the scale of the issue, China now has state-run mining facilities around the world such as in Argentina, Congo, Ecuador, and has invested in others. Its international production exceeded its national production by 16 tons in 2018. China is also the world’s largest gold importer, overtaking India in 2014. We know from data from Hong Kong that since 2000 6,000 tons of gold have entered China.
There’s plenty more to be said on this matter but to keep it short if it turns out that China has more gold than they say, it could send shudder into the commodity markets and rapidly decrease the price of gold.
Bitcoin is a better store of value
On the topic of supply, Bitcoin is unlike other currencies. All fiat currencies are inherently inflationary. Every year more and more dollars, sterling, and euros are printed by central banks without much prior transparency as to how much they’re going to print. Bitcoin is inherently deflationary. The supply is constrained to a certain extent and will never exceed 21 million. In addition, every 210,000 blocks, the amount that enters circulation every block (roughly every 10 minutes) halves. So technically the supply increases but it increases at a decreasing rate.
This concept alone is worth strongly considering. A clear and transparent supply is a keep to price stability in the long term.
Bitcoin can’t store value until its volatility decreases
The supply of the commodity is irrelevant if it’s still too volatile to store wealth. Despite its transparent supply, Bitcoin and gold volatility aren’t even in the same league. Bitcoin has been far more volatile. The primary reason for this is because the total market capitalization of gold is far greater than Bitcoin at $9 trillion and $200 billion, respectively. Individual institutions and investors have the ability to impact the price to a higher degree because they can have a higher total percentage of the market cap. For example, a typical hedge fund with $1bn would own 0.5% of the market cap of Bitcoin and could change the price if it decided to dump their bitcoin or use their reserves to buy some. If that same hedge fund had $1bn and put it in gold it wouldn’t own 0.01% and so would have less of an ability to change the price.
As Bitcoin continues to grow so will it’s market cap and the price fluctuations will smooth out.
Conclusion of Bitcoin versus gold
There are a number of doubts to be had about gold and its supply. Some issues may become apparent in the next few years and others will take several decades but, overall, the future is cloudy. Bitcoin’s future may not be clear, but the foundations are clear and the structure is rock solid. Therefore, there is a strong argument to suggest that Bitcoin is a better source of value than gold.