Bitcoin is "better gold than gold"? Don't dream!

According to the media, the price of Bitcoin exceeded the price of gold for the first time last week. However, Stefan Wieler, vice president of GoldMoney, said in his research report that this comparison is completely subjective.

Gold is measured by weight, while Bitcoin is an abstract form of currency that can only be measured in its own units. One Bitcoin is worth more than 1 gram of gold, but far less than 1 ton of gold. Despite Bitcoin's outstanding performance last year, the size and depth of the digital cryptocurrency market is still far smaller than the $7 trillion gold market.

Therefore, gold is still the only currency in the world with a size and volatility comparable to that of fiat currency.

Bitcoin, or digital cryptocurrency, is the most exciting monetary experiment of our time.

Unlike fiat currencies, it cannot be printed, but it has the scarcity of gold because it takes a lot of energy to create one Bitcoin. The energy value links gold to the primary industry and allows it to maintain purchasing power for a considerable period of time. Without it, any form of currency will inevitably decay over time.

Bitcoin also has some energy value, so in theory, like gold, Bitcoin is a global currency that can be universally accepted in the future, even if the US dollar cannot achieve this function.

On the other hand, Bitcoin also has some properties that no other form of currency has, most notably complete anonymity in electronic transactions, which is why some people believe that Bitcoin cannot be widely adopted as a currency.

At present, despite the sharp rise in the price of Bitcoin, its global total volume is still only 20 billion US dollars, and the transaction volume is still small compared to other currencies. However, as the adoption rate of Bitcoin increases, governments will inevitably pay more attention to the issue of anonymous transactions and may also prevent companies from accepting Bitcoin as currency.

Only time will tell the answer to the above hypothesis, but for now, as an option for bank depositors to escape the inherent decay of fiat currency, Bitcoin remains the only alternative to gold and other precious metals.

At present, the price of Bitcoin in some exchanges has obviously exceeded the price of gold. Some mainstream media even said that Bitcoin has become "better gold than gold" because the volatility of Bitcoin is currently lower than that of gold. However, we predict that the volatility of Bitcoin will return to 100% in the near future.

Bitcoin has risen by nearly $500 in the past year, and by $100 in the first two days of this year alone. The price of 1 Bitcoin has also exceeded an ounce of gold. Although this is conceptually very imprecise, it will not stop the media from giving the headline "Bitcoin Price Exceeds Gold".

Gold and other precious metals can be measured by weight units (ounces, grams, tons, etc.), which is a naturally given unit of measurement, while fiat currency or any other abstract currency (including Bitcoin) cannot be measured in this way and can only be measured by its own units. Therefore, gold and silver are the only forms of currency traded by weight today.

Fiat currencies, on the other hand, cannot be measured by other forms of money other than fiat currencies, and this has been the case at least since Nixon delinked the dollar from gold in 1971. In this respect, Bitcoin falls into the same category as fiat currencies.

Therefore, when comparing the price of gold to Bitcoin, one must first define the unit in which the price of gold is measured. Is it grams (currently $38/gram), ounces ($1,173/ounce) or tons ($37 million/ton)?

Comparing the price of 1 Bitcoin to 1 ounce of gold is a bit like comparing the share price of US pork processor Seaboard ($4,179 per share) to Apple ($116 per share) and concluding that Seaboard is 35 times more valuable than Apple, but it is clear that Apple, the world's largest company by market capitalization, is about 126 times more valuable than Seaboard.

In terms of market size, Bitcoin and other digital cryptocurrencies are far behind the gold and silver markets. In fact, the total market value of all digital cryptocurrencies (according to statistics, there are about 710 types) is only US$21 billion. The following figure clearly shows the gap between digital cryptocurrencies and other currencies and the gold and silver markets:

There is another obvious factor when comparing Bitcoin and gold: volatility. High volatility is often cited as a major flaw in questioning gold's role as a medium of exchange and store of value, but overall we find that gold's volatility (measured in standard deviation) is roughly comparable to currencies, and even when taking interest into account, gold has proven to be a better long-term store of value than any other currency.

The average volatility of Bitcoin is significantly higher than that of gold and fiat currencies. Previously, the volatility of Bitcoin has also declined twice, even approaching the volatility of gold and fiat currencies, but it often rebounds sharply afterwards, as shown in the figure below:

Furthermore, standard deviation should not be confused with a measure of risk. Standard deviation determines the dispersion of returns, but does not distinguish whether that dispersion is moving upward or downward.

For example, an asset that returns 1% on one day out of two and 0% on another day would have an annualized standard deviation of 8%, while another asset that returns -1% on one day out of two and 0% on another day would also show the same standard deviation. In the context of asset management, these two assets have the same risk, but for a saver, the first asset is significantly less risky.

Therefore, we are not measuring the fluctuation of standard deviation, but only the fluctuation of downside deviation, which will give us a better understanding of risk. After completing the data comparison, we found that Bitcoin's downside deviation is still several orders of magnitude higher than gold or fiat currency. As shown in the figure below, Bitcoin's downside deviation has exceeded 45% in the past two years and exceeded 100% since 2010.

Volatility, or downside risk, makes it difficult for Bitcoin to be used more widely as a currency. For Bitcoin, it has indeed had an outstanding performance in the short term, but this performance comes with considerable downside risk, and businesses that accept Bitcoin as payment currency are exposed to this downside risk unless they convert Bitcoin into other fiat currencies immediately after the transaction.

Although theoretically an exchange cycle only takes about 6 minutes, it actually takes an hour for Bitcoin to be exchanged for fiat currency to confirm the transaction and another hour to confirm the price, during which time the business will inevitably be affected by downward fluctuations.

Although holding Bitcoin permanently may have huge upside potential, it also comes with downside risks that a business cannot tolerate. After all, a business should spend its time and energy on selling goods, not on trading Bitcoin with legal currencies.

Some market participants also pointed out that Bitcoin, like gold, has no counterparty risk, which is also debatable. At present, another new digital cryptocurrency has emerged: Ethereum, whose master key is controlled by a committee that determines its future inflation rate, but the master key of Bitcoin is controlled by its chief developer Gavin Andresen. We cannot guarantee that he will not change the open source code of the Bitcoin blockchain in the future. Therefore, in this regard, we do not believe that Bitcoin has no counterparty risk. The blockchain itself is a "fat tail risk."

In short, from the current perspective, gold is still the only global currency that individuals and companies can trade at any time. Its price fluctuations are basically the same as those of major currencies, but there is no counterparty risk. It has been a globally recognized means of storing value for centuries. (Information support: Bitport)