Bitcoin vs. Gold: Background, Analytics, and Price Estimates

The Bitcoin vs. gold debate has been raging ever since Bitcoin came onto the scene in 2009.

Whether you're a 'goldbug,' Bitcoin maximalist, someone in-between, or just watching from the sidelines, you've seen the battles play out on social media and even start to creep into everyday life (with family, friends, coworkers, news, etc.).

In this piece, I'm going to try to answer some of the most common questions in the Bitcoin vs. gold debate using real-world data.

In the end, I'm going to show you where "Bitcoin vs. gold" is today, where I think it's going to go, and what that means for the future prices of these assets.

How Bitcoin and Gold are “The Same”

Now before we get into how these two assets differ, I'd like to show you how they're the same. You might be wondering, "How can they possibly be the same?" Well, I'll let Robert Kiyosaki, author of Rich Dad Poor Dad, answer that real quick:

I buy Bitcoin for the same reason I buy gold: I don't save dollars. Why would I save something that can be printed?
-- Robert Kiyosaki

Bitcoin and gold are both trying to solve the same problems.

They've also been chosen by the market as a form of money at different times by different people for different reasons.

But while we're trying to figure out the future "winner" of the Bitcoin vs. gold debate, it's important to emphasize the commonalities between the two so these seemingly opposed communities can hopefully join forces in the future.

What makes Bitcoin and gold the same at their core is what Robert Kiyosaki is alluding to: they both attempt to protect purchasing power.

However, how these two assets achieve that are quite different resulting in different outcomes, but fundamentally the mechanism employed by both is rooted in the idea of scarcity resulting in hard money.

Source: Visual Capitalist

Along the same lines of being inflation hedges, neither Bitcoin nor gold can be "printed" or "keystroked" into existence by some biased "authority figure".

What that means is real human time and energy MUST be expended to produce Bitcoin and gold, unlike fiat money created by central bankers at will.

This aims to solve the problem of having our money actually backed by something tangible, and, ideally, something as scarce as our limited time in this world.

Another core problem both Bitcoin and gold are trying to solve is custodianship. Or, who really owns and controls your money?

If you hold dollars, euros, pounds, pesos, or whatever in a bank account and your bank decides to restrict access to your funds, is that really your money?

What if your bank told you, "Nah, you can't send your money to a crypto exchange." or "You know that gold you have stored in your safety deposit box? Lol it's not yours anymore."?

Having full custody of your assets means you can do what you want with them because you hold them.

Bitcoin and gold are forms of scarce, hard money that require real human resources to be produced and can be self-custodied.

In my opinion, these are the most important points that make Bitcoin and gold "the same". Of course, there are other points. But while they're both attempting to solve similar problems, they most definitely differ in their approach and effectiveness.

The Primary Differences Between Bitcoin and Gold

The obvious main difference between Bitcoin and gold is that the former is digital and the latter is physical. Following that, however, are several other key differences that present various advantages, disadvantages, and risks associated with both.

Before we get into this, it's important that you know this isn't an exhaustive list of all the differences between Bitcoin and gold. That's why I chose to focus on what I believe to be the principle components that make these two assets so very different.

Transferability

Bitcoin being digital and gold being physical certainly changes the way you can transfer and store these two assets.

For example, someone sent over $1 billion of Bitcoin for less than $1 (at the time of the transfer) The transfer was completed within an hour. Now it's probably stored in a device the size of a USB.

If you tried to do that with gold, you'd be shipping over 17,000 kilos (or 37,000 lbs) of gold from one part of the world to another.

That would take months and would obviously cost more than $1 when accounting for labor, fuel, security, insurance, storage, etc.

Storage and Portability

Just as Bitcoin and gold are similar in terms of self-custodianship, they also differ in the way they're stored. Yes, they both can be held outside the traditional financial system, but in different ways.

With gold, you can store it in a vault, bury it in your back yard, or wherever you want. While it's nice that you can physically see your gold, you'll likely have to pay a regular fee to keep it stored somewhere safe.

With Bitcoin, you can keep it safely "stored" with an affordable device called a hardware wallet, which is the size of a USB stick. In fact, any Bitcoin you own is technically stored on the Bitcoin network.

While everyone can see it, only you have access to it via your private key, which allows you to move it around as you please. Without your private key, your Bitcoin is unspendable.

Inflation Policy and Total Supply

Another key difference between Bitcoin and gold is that Bitcoin has a hard coded inflation rate that reduces over time and ends up at zero.

This means that once all Bitcoin has been mined, that's it. And the total supply can't be greater than 21 million. With gold, it's a bit different since it's possible to mine it from mother nature at whatever speed gold miners are economically capable and incentivized.

This means the inflation rate for gold fluctuates and there's theoretically no limit on the total supply. Even if gold someday ran out on Earth, it's theoretically possible that it could be mined on other planets or even on asteroids.

Source: bitcoinblockhalf.com

Monetary vs. Industrial use Cases

Gold has multiple use cases apart from being money while Bitcoin is purely a monetary good. With gold, you can use it in jewelry, electronics, art, food, medical equipment, and more.

With Bitcoin, you can pretty much only use it as money. In this case, goldbugs will criticize Bitcoin because it doesn't have any other real-world, physical value while Bitcoiners will criticize gold for having more use cases than necessary (i.e., it's not a pure monetary good).

This is ultimately an argument over monetary premium vs. industrial demand, or how much an asset is used as a monetary good vs. other practical use cases.

Source: The Bullish Case for Bitcoin by Vijay Boyapati

Divisibility

A whole Bitcoin is actually the summation of 100 million Satoshis (or 0.00000001 BTC), which means you can buy, sell, and transfer as little as one Satoshi.

In the future if one Satoshi is too large (in terms of purchasing power) for small purchases, it's possible more decimal places could be added to the protocol.

For gold, you can also divide it down, but it's a much more cumbersome and expensive process since you have to either shave your gold bar down, clip your gold coins, or re-melt your gold with other non-gold metals to dilute the purity.

Durability

The previous section alluded to an issue with Bitcoin's durability; it's possible it can be changed in the future if the community reaches consensus.

While that's becoming increasingly more difficult to pull off due to the growth of the network's hash rate, the level of decentralization among miners (geographically and by pool), and the sheer cost of a 51% attack, it's always a possibility since Bitcoin is a public blockchain.

Thanks to the laws of nature, gold is gold is gold, and always will be.

Historical Relevance

Here's a huge difference between the two: Bitcoin's been around for a little over a decade while gold's been around for thousands of years. This fact alone makes gold feel more trustworthy, thus safer.

Gold's been time-tested for centuries while Bitcoin's still proving its case.

Source: The Bullish Case for Bitcoin by Vijay Boyapati

Price Volatility

The price of Bitcoin has been much more volatile than gold. This makes sense if you consider Bitcoin as a blossoming asset that's still in its price discovery phase with new users entering the network every day. But it's still something to keep in mind for those with a target risk budget.

However, it's important to point out that Bitcoin's volatility, while certainly large on the downside, is MUCH larger on the upside. We'll get into this in more detail later on.

Price Performance

With that in mind, we all pay for price-performance (or returns) in the currency of volatility (or risk). When it comes to Bitcoin vs gold, it's clear that Bitcoin has outperformed gold in the time they've both been in existence.

Bitcoin has grown from fractions of a penny to tens of thousands of dollars within a decade, which has resulted in Bitcoin's over 200% compound annual growth rate.

No other asset has ever performed that well in such a short amount of time and has continued to exist. Again, we'll get into this in much more detail later.

Censorship Resistance

Banks and payment processors have become the ultimate controllers of our money in the digital age.

Without Bitcoin or gold, we'd be in a pretty dark place.

However, with Bitcoin you have digitally native AND censorship-resistant money (i.e., no one can stop you from transacting with anyone else).

With gold, there's nothing digital it resulting in you handing it or shipping it to your would-be recipient. Even then, if a government or authoritative regime wanted to censor you for good, they could just outlaw gold then legally steal it from you (the US did it).

With Bitcoin, (thanks to cryptographic one-way functions) they'd need you to tell them the seed phrase you memorized or "unfortunately misplaced".

Network and Asset

Last but not least, Bitcoin is not only an asset, but it's also a network protocol. Gold on the other hand is just an asset. You can think of this like how the internet works. Whenever you interact with the internet, you're transferring bits around a network via the TCP/IP protocols.

Similarly, when you transfer Bitcoin from one address to another, you're sending bits around via the Bitcoin network protocol. That's why Bitcoin is considered both an asset AND a network.

An Analytical Viewpoint of Bitcoin vs. Gold

At this point, you should have a good idea about the differences between Bitcoin and gold. You're probably also aware that I'm biased toward Bitcoin being a better monetary technology than gold.

That's 100% true, but not out of blind faith or hopium.

My belief that Bitcoin is better than gold and will be the victor of the Bitcoin vs. gold debate is not only based on the primary differences that make Bitcoin an overall improvement on gold but also based on several key analytics that can be derived from publicly available data.

Let me show you.

First of all, we already had a glance at how the price of Bitcoin and gold performed in recent years. So what if you had put just $1 into both assets in early 2013 and just held them til today?

Your Bitcoin would be worth $348.29 and your gold $1.23. That's a return of 34,729% and 23%, respectively.

Here's the logarithmic plot so you can see more clearly the spread between the two assets' performance.

Clearly, Bitcoin beats gold in terms of price performance, but what about the risk (or volatility) we "pay" to get those returns. As we saw earlier, Bitcoin's volatility is around 3 to 6 times as large as gold's!

For this reason, we need to look at the Sharpe ratio of these assets, which is essential returns divided by volatility. This allows us to visualize how many units of return we get from "paying" one unit of risk.

Alright, so what does this chart show? At a glance, it shows that Bitcoin's Sharpe ratio is usually positive and greater than gold's. That means by holding Bitcoin you get more returns for the same amount of risk as you would with gold.

That's an "at a glance" analysis, so let's take a look at the hard numbers of these two assets' Sharpe ratios.

The chart below shows the number of days each assets' Sharpe ratio was zero or less, above zero, above one, above two, and above three. Having a Sharpe ratio zero or less means you're average returns have been negative.

When looking at Bitcoin vs. gold, Bitcoin's had a negative Sharpe ratio only 23.4% of the time while gold's had them 41.1% of the time.

What's also interesting is that Bitcoin's had a Sharpe ratio above one around 50% of the time compared with gold's being 23.9%.

This means Bitcoin would have used your risk budget more than twice as efficiently when extracting positive returns than gold. There were even periods where Bitcoin had a Sharpe ratio above three while gold had none.

There's no question that Bitcoin's been a better investment than gold in terms of returns and risk. But being a better investment isn't the only battle to be won in the Bitcoin vs gold debate.

For Bitcoin to truly beat gold, it has to do it in terms of market capitalization (i.e., the price of the asset multiplied by its supply). As of the recent time, Bitcoin is closer than it ever has been to "flipping" gold, but it's still a ways away.

Obviously, gold has been around longer and has time to suck up its share of the world's capital up to the tune of $12 trillion. Since Bitcoin's been around, it's barely broken $1 trillion.

But what's fascinating is the progress Bitcoin's made in the journey to flip gold, which is best visualized via these two assets' logarithmic market caps.

Since early 2013, gold's market cap has grown 43% while Bitcoin's has grown 58,883%. That's faster than the price-performance we looked at earlier! If this performance spread holds, Bitcoin flipping gold is inevitable.

A common critique in the Bitcoin vs. gold debate is that Bitcoin isn't competing with the total supply of gold, but instead just the investment supply.

I agree at some level, holders of gold in terms of jewelry and official holdings still have investing in the back of their minds.

Either way, let's take a look at how gold's market cap is split up in terms of use cases since it's not a pure monetary good and comparing the total supply of gold to Bitcoin isn't 100% fair.

As you can see, jewelry is the largest percentage of gold supply followed by bars and coins, official holdings, other fabricated and unaccounted gold, and ETFs. Let's see where Bitcoin sits in comparison.

Looks like Bitcoin's already flipped gold ETFs more than 3 times over, which is a part of gold's investment supply along with bars and coins. But how does Bitcoin look when compared with gold's total investment supply?

While Bitcoin hasn't flipped gold's investment supply, it's already 33.3% of the way there. That means if Bitcoin were to flip gold's investment supply, at today's numbers it would be worth over $140,000.

This is a good segue into how we can go about tracking the progress of the Bitcoin vs gold debate and how to estimate future prices of Bitcoin.

Just as we compared the market cap of Bitcoin with gold's investment supply market cap, we can do the same thing with gold's total supply.

I like to call this the flip progress, with the current flip progress of Bitcoin vs gold sitting at around 7.5% after hitting a recent all-time high of 10%. Before the end of 2020, the flip progress barely broke 2%.

If you assume the trend of the Bitcoin vs gold flip progress will continue, you can extrapolate out Bitcoin's market cap and compute price estimates at different flip progresses.

If Bitcoin were to completely flip gold, at today's numbers Bitcoin would be worth over $630,000.

Of course, these price estimates are exactly that; estimates. Pricing any asset into the future is inherently uncertain and just gives us a guess of what could be. All we can really do is measure the trends and keep our eyes on the numbers as they evolve.

Following this pricing mechanism, we can attempt to estimate Bitcoin's future price. Estimating how the future unfolds is a completely different beast, so let's lay the groundwork for some potential future scenarios in the Bitcoin vs. gold debate. From there, we can make some simple price estimates.

Scenarios and Price Estimates

We're about to enter the world of uncertainty, so I'll try to keep it brief.

While I have my opinions on how the Bitcoin vs gold debate will play out, by no means am I saying any of this will 100% happen. That's why you should take this all with a grain of salt and do not take it as investment advice. This is all purely informational.

Scenario #1: Bitcoin Fails and Approaches Zero

There's always a chance, no matter how small, that Bitcoin could completely fail resulting in a price at or near zero.

Obviously, something serious would have to happen for this to occur, like a prolonged 51% attack, a hacking of the SHA-256 algorithm, or all of the world's telecommunication systems shutting down forever.

A Yale economist pointed out that there's a 0.3% chance of Bitcoin hitting zero. It's probably even less than that and is by far the least likely of any of our scenarios.

Scenario #2: Bitcoin Stagnates and Stays Where it is Forever

What if Bitcoin just stays where it's at forever? What does it mean for Bitcoin to stagnate? A stagnation scenario could mean multiple things, including a never-changing price, market cap, or flip progress.

We'd obviously know where the price of Bitcoin would be if it never changed; today's price. However, if the market cap never changed, over time the price of Bitcoin would slowly go down since freshly minted Bitcoin will be entering the market for another 100+ years.

If the flip progress never changed, Bitcoin would move when gold moved.

This scenario seems unlikely based on the trends of Bitcoin's price, market cap, network growth, layer 2 growth, institutional investment adoption, and nations adopting it as legal tender.

Scenario #3: Bitcoin Approaches Gold but Never Reaches it

Now let's get into a scenario that's more likely to happen; Bitcoin continues on its upward trend but never actually flips gold. This could happen in a couple ways:

1. Gold's market cap starts to outperform Bitcoin's and Bitcoin is never able to catch up.

2. Bitcoin's market cap continues to outperform gold's, but then, later on, underperforms relative to gold thus never to completely flip it.

The first seems unlikely since there's zero sign of gold outperforming Bitcoin in the near term.

The second is more likely since Bitcoin currently has the upper hand in terms of momentum, but still has a lot of ground to cover in terms of the flip progress.

If this scenario were to play out, we'd see Bitcoin's price range above today's price and below the 100% flip progress price. At today's numbers, that range would be about $50,000 to $630,000.

Scenario #4: Bitcoin flips gold and ranges at par

In this scenario, Bitcoin flips gold completely (i.e., flip progress = 100%) and oscillates around that point.

Essentially this would result in Bitcoin's market cap being pegged to gold's market cap with fluctuations.

As we explored already, at today's price Bitcoin would be around $630,000 if this happened, but this time with fluctuations above and below that price.

However, if you believe Bitcoin is a replacement for gold as the world's hard money asset, then this scenario is not realistic. Why?

Because Bitcoin's market cap would eat up gold's market cap (or "take away users") since it's the better alternative. This would result in gold's market cap stagnating or decreasing in real terms, which is exactly what's playing out today.

That's why I believe the next scenario is the most likely.

Scenario #5: Bitcoin Flips Gold and Starts on a new Flipping Adventure

If Bitcoin flips gold, there's no reason to assume that it'll stop there. Again, since it's a better version of gold, it would obviously take away some of gold's market cap.

But the fact that Bitcoin is a better version of gold is exactly why it has every reason to break through gold's market cap and continue on so as to price in those improvements.

Beyond that, a new flipping adventure awaits. For many, Bitcoin is much more than being the ultimate version of gold. It's the ultimate global reserve currency.

If this scenario were to play out, Bitcoin would replace a portion or all of what we consider today as the global reserve currency; the US dollar and US Treasuries.

What would that mean for Bitcoin?

Well, today the total value of the US broad money supply is over $20 trillion. If Bitcoin were to flip that, as of today a single Bitcoin would be worth over $1 million.

Source: St. Louis Fed

Final Thoughts

The Bitcoin vs. gold debate will continue to rage on.

Regardless of the advantages and disadvantages of either asset, they are in essence attempting to solve the same problem; to preserve our purchasing power.

However, Bitcoin has proven to be a better version of gold both qualitatively and quantitatively. Knowing that, it's only logical to assume that the more optimistic scenarios in terms of Bitcoin flipping gold are to unfold.

But who knows. Bitcoin could be worthless. It could be worth hundreds of thousands of dollars. It could be worth millions of dollars. It could become "the new dollar". Either way, simply not owning any Bitcoin appears to be the most costly scenario.

I’m Grant and I’m a freelance fintech writer! If you’re looking for engaging, informative fintech content that speaks to your audience and can grow your brand awareness and online reach, I can help.

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