It's trendy to call Bitcoin (BTC -0.73%) "digital gold" lately, thanks to its scarcity. But could it be worth more than all of the actual gold that's in circulation someday?
It's a lot more likely than it sounds. It might even be inevitable. Here's what would need to occur for it to actually happen.
CRYPTO: BTC
Key Data Points
The math is the least important part of this equation
For Bitcoin to flip gold, it'd need to become tremendously more valuable, but that's not as meaningful as it may seem.
Today, Bitcoin's market cap is approximately $1.6 trillion. The total market cap of gold, assuming it's priced at $2,996 per ounce, and assuming we're talking about the world's above-ground reserves, is close to $20.1 trillion. Therefore Bitcoin's price would need to rise by a bit more than 12.2 times where it is right now to be the same value as gold. In other words, the price for each coin would need to be higher than $1,014,264 to confirm that a flipping had occurred.
Bitcoin's value rose by 1,430% in the last five years. Therefore the asset, at least in recent history, is more than capable of growing by the necessary amount to be worth more than gold. But the more important thing to recognize is that the drivers for that immense growth are still in play, which is why the flipping is actually a credible possibility.
People buy and hold gold because it's expected to retain its value over time, even in harsh economic conditions, and even if phenomena like inflation erode the value of the fiat currencies that it can be sold for. That works because gold is scarce, as it requires significant investment of effort to mine and refine. Another factor is that it's tradeable on deeply liquid global markets, so there is a very high probability of sellers finding a buyer even under significantly disrupted conditions. Another reason gold holds value is because gold is a necessary material for real-world applications like manufacturing cellphones.
So it behaves as a store of value, a medium of exchange, and as something with utility value as well. But it isn't necessarily the easiest asset to hold or use from an investor's perspective.
Physical gold needs a place to rest, and it's fairly awkward to liquidate when needed compared to a stock or cryptocurrency. Exchange-traded funds (ETFs) that grant investors exposure to gold charge annual fees. Claims to gold held in a bank's vault may not be easily tradeable, and they require a lot of trust in a third party.
Bitcoin doesn't suffer from those problems. Sure, it has other problems, like its much higher volatility, and its relatively limited utility value. But the main sources of its value, the difficulty of mining it and its inherent scarcity, clearly resonate with the world's investors, given the asset's meteoric rise since its relatively recent launch in 2009.
And it's only going to become produced at lower and lower volumes over time.
Will this actually happen?
For Bitcoin to flip gold's value, it'll need to continue being adopted and held by the world's financial institutions, governments, and investors.
That means more governments will need to initiate and actually implement policies like the Strategic Bitcoin Reserve of the U.S., which is itself not yet implemented. Bitcoin will also need to continue deepening its links with the traditional financial sector via ongoing approvals of new ETFs holding it, as well as ETFs that hold it in addition to other cryptocurrencies. In practice, banks and other financial players will be the ones driving that shift.
Today, an estimated total of 106 million people hold the coin, so there's plenty of adults in the world it could onboard over the coming years, meaning that there's a lot of additional capital that could flow in. As buying Bitcoin becomes even more accessible to investors than it has been, more and more will want to get a little bit of exposure to it. And, if the price continues rising over time, as it has throughout its life so far, that'll be powerful advertising that entices more people to buy and hold it forever.
So could Bitcoin become a bigger asset than gold someday? Yes, it could, but there's not much point in putting a timeline on it. The best move is to slowly build up a position and retain it, and then you'll get the benefit of its growth over the long term even if it takes years to flip gold.
