Is bitcoin really the new gold?

There have been many narratives around the cryptocurrency sector, both good and bad, over the years.

Every cycle seems to present a new one; in 2017, we saw the construction of a new narrative that ruffled the feathers of many outsiders while giving hope to crypto enthusiasts globally.

The topic “Is Bitcoin the new gold?” was widely laughed at back then. However, considering Bitcoin’s market cap was around $12.5B on January 11th, 2017, compared to a median market cap value of $7.5T for gold, there wasn’t much of a case to defend Bitcoin.

But in recent times, thanks to the bull run of 2017 and the one that began in late Q1 of 2020, the world watched as Bitcoin’s market cap propelled upwards, nearly reaching $1.3T. 

Although gold’s market cap increased alongside Bitcoin, almost breaking $13T in March of 2022, Bitcoin was undoubtedly closing the gap. 

Even though a 10x increase in market cap over three years was enough to turn even once naysayers into Bitcoin maximalists, there are still various factors to consider before one can effectively answer this question.

Stock-to-flow

Bitcoin’s stock-to-flow (S2F) model was created in 2019 by a Twitter user named “PlanB,” who has since become famous to some and infamous to others. 

The S2F model provides an estimated forecast of an asset’s future price by calculating its scarcity. This is done by taking the current circulating supply of said asset and dividing it by its annual production number. 

The higher the number, the more scarce the asset. In late 2021, Bitcoin had an S2F value of around 57, while gold was 62. Indeed a contrast between the two numbers, yet a minute one. 

Both assets are limited in supply, yet multiple arguments can be extracted within this one statement.

For one, there is quite a difference in dates for when each asset’s available mineable supply will become obsolete. For gold, it is estimated that the date is around 2050 to 2070; for Bitcoin, it is estimated to be 2140.

Even so, one must consider Bitcoin’s halving cycle events occurring every four years. When a Bitcoin halving occurs, each block mined will payout 50% less in rewards. 

Therefore, although the date when the last Bitcoin will be mined is estimated at 2140, some BTC maximalists argue that comparing this date to gold is irrelevant. 

BTC’s maximum supply is set and cannot be changed; that’s a fact. There is a chance that we can reach the halving cycles faster than estimated since it is based on block heights, not the number of years. 

But then there’s always the case that the remaining supply of unmined gold is just an estimation, which could be much lower than expected. But, of course, it could also be much higher than expected. 

In 2020, PlanB released a new updated S2F model, which he coined S2FX. He explained his reasoning for doing so was that S2F was time-weighted, and wanted to change that.

Instead, he wanted to provide a model that showed a more evident valuation of Bitcoin against assets such as gold and silver instead of time. 

Until 2021, PlanB’s original S2F model and the new S2FX model were nearly spot on. But since then, it had almost become invalid. For example, in mid-2022, when BTC was trading in the low $20k region, BTC’s price was supposed to be around $250k, according to both models. 

A haven in times of chaos

Gold has a track record of being a haven during economic turmoil and uncertainty. As a result, a standard indicator many economists and investors use to judge the state of the markets and economy is the price of gold.

In every recession faced until modern times, investors have flocked to gold to protect their wealth as it’s seen as a slow-moving yet stable asset. Oddly enough, this also happens to be when, historically, the price of gold experiences the most volatility. 

BTC maximalists, however, believe that during future times of economic downturn, Bitcoin will become the favored asset over traditional vehicles like gold.

One of their key points is that BTC was created during the 2008 crisis to solve the failed global monetary-financial system. Still, the reality is that Bitcoin has never experienced a recession. 

While the volatility of the leading digital currency is favored during bull runs, everyone is also aware of how drastic the movements to the downside can be during bear markets. 

The narrative that “institutions are in” so this time will be different, albeit interesting, can be seen as pure speculation, especially since large institutions had a significant role to play in 2008’s crisis. 

The wrong correlation

Traditionally, during economic distress, the stock market has always been the main case study that garners global attention for how bad or deep a recession the underlying economy is in.

Bitcoin moved independently from the stock market a few years ago, but that seemed to change with the COVID pandemic.

Assets across the board reacted negatively to the black swan event, as they often do. However, when the markets began to rally back, BTC seemed to pair itself with certain indexes, such as the S&P500. 

It was an emotional roller coaster ride for anyone invested in the markets then. But, as the pandemic continued, so did the rally upward.

Then, as the markets’ momentum began to change, BTC held its pair to those same indexes that usually get hit the hardest in recessions. 

Will BTC break away from this pair? 

Is Bitcoin the new digital gold or not

Only time will tell whether this theory is valid or not. 

But, a question to consider; if gold mainly takes the spotlight during economic collapses and otherwise is a slower mover outside of that period, should the cryptocurrency space truly want Bitcoin to be the new gold?

While no one should want a recession to occur to test this assumption, eventually, the answer will be revealed. 

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