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Hello friends,
Today we are going to explore Bitcoin’s potential to be the new digital gold.
A few definitions 🤓 before we start. Skip ahead if you’re feeling spicy:
Bitcoin vs bitcoin = Bitcoin (big B) is the blockchain/network; bitcoin (little b) is the asset
Proof-of-Work (PoW) = a decentralized consensus mechanism that requires members of a network to expend effort (e.g. electricity) solving a mathematical puzzle to prevent gaming of the system. Analogy: requiring a small fee to be sent with each email to reduce spam
Proof-of-Stake (PoS) = similar to PoW, but members “stake” tokens (lock tokens into a smart contract) instead of expending computational effort. This is similar to a security deposit you would pay to your landlord. Your stake will be “slashed” (taken) if you don’t follow the rules of the network
Mining = the process of solving mathematical puzzles in PoW to find the correct “answer” + create the next block + earn new tokens (the block subsidy) and transaction fees
Hash Rate = a measure of the computational power per second used when mining. In PoW, a miner’s probability of mining the next block is proportional to the miner’s % of the network’s total hash rate
The Halvening = the moment when Bitcoin's block subsidy gets cut in half: occurs every ~4 years
Turing Complete = a system that can perform the same calculations as a general-purpose computer
Gold, as an asset class, is ~5x more valuable than Apple. Based on utility, forget Apple, AirPods should be worth more than gold. But utility alone is not what establishes a store-of-value: consensus does.
What if bitcoin is the new gold? A digital gold. If you believe that’s possible, it’s easy to see why many believe Bitcoin is undervalued.
The Numbers
The market cap of mined gold is ~$11.5 trillion. Conservatively, 55% of gold's market cap is investment related. This 55% is the “monetary premium” of gold - the attributable value in excess of commercial use cases.
The remaining ~45% includes jewelry (37%) and manufacturing electronics (8%). The relationship is somewhat circular, but gold’s investment value is the primary driver of gold’s utility in jewelry. Some would argue gold’s monetary premium is closer to 92% (55% + 37%), but we’ll stick with 55% to be conservative.
An aside: what if bitcoin replaced gold as a primary component of digital jewelry?
It’s simple math. Gold’s monetary premium is worth $6.3 trillion ($11.5 x 55%). Bitcoin’s fully diluted market cap - at $40K per BTC - is $840 billion. If bitcoin can match gold’s monetary premium of $6.3 trillion, each bitcoin will be worth ~$300K: a 653% increase from today’s price.
The Theory
Gold’s monetary premium is a shared delusion. The $6.3 trillion premium is simply a sum of many bets that other people will use gold as a store of wealth. There’s no intrinsic value besides a shared narrative.
Why did society adopt gold as a store-of-value schelling point? Gold is:
scarce; a limited supply created via physics
durable; never rusts or corrodes
portable; can be traded and re-located via trucks, ships and planes
divisible; you can melt gold down into smaller units of value
But what if Bitcoin is a better, digital version of gold?
Sure, you can trade gold ETFs and futures, but these are still backed by real gold, in physical warehouses, with crazy-expensive security. If the world wants a decentralized (not controlled by a central party) store of wealth, maybe we should adopt an internet-native asset.
Let’s review the characteristics of gold in comparison to bitcoin: Bitcoin is:
scarce; There will never be more than 21 million bitcoin. Gold is legitimately scarce on earth, but not in the solar system
durable; bitcoin is digital
portable; bitcoin can be transferred globally in ~10 minutes. You can’t carry a single gold bar in your pocket, but you can store all 21 million bitcoin on a smartphone
divisible; bitcoin is divisible up to 8 decimal places. At today’s prices, the smallest unit of BTC is worth $0.0004. Unlike gold, no melting is required
From this high-level perspective, bitcoin is a better store of value by every metric. This sentiment is gaining global adoption. Bitcoin has traded as high as $64K, and estimates claim that over 46 million Americans (seems high) hold bitcoin. Bitcoin is slowly becoming a new schelling point of monetary value.
The Bear Case
It seems simple. Why wouldn’t we adopt a digital version of gold?
Sustainability Concerns
Bitcoin’s proof-of-work (PoW) consensus mechanism expends a massive amount of energy: around 110 Terrawatt Hours per year. I don’t understand Terrawatt Hours, but that energy usage is equivalent to small countries like Malaysia and Sweden. This expenditure creates “real” value (if you believe in bitcoin), but sustainability concerns abound.
Bitcoin’s energy mix will drive the sustainability narrative.
It is estimated that 39% to 73% of Bitcoin’s energy consumption is carbon neutral/derived from renewable energy resources. Mining companies are highly competitive and aren’t eager to reveal their competitive edge - hence the roomy estimate range. Proponents posit that bitcoin’s growth will spur innovation in renewable energy and that Bitcoin will eventually be carbon neutral.
Bitcoin could solve the energy dilemma by replacing PoW with PoS (proof-of-stake), which uses 99.95% less energy. Bitcoin can sit back, watch other protocols (Polkadot, Solana, Ethereum 2) perfect PoS, and adopt PoS if deemed appropriate in the future. However, Bitcoin purists will argue that PoS is less decentralized, less secure and that transferring to PoS is antithetical to Bitcoin’s “immutability” mantra.
In the interim, Bitcoin’s ESG concerns may inhibit investment from large institutions and investment funds that prioritize sustainability. This limitation could disappear if Bitcoin eventually runs on renewable energy or switches to PoS.
In comparison, gold doesn’t have a consensus mechanism that consumes energy because physics determines its physical properties and production. This doesn’t mean the gold industry is environmentally friendly. Gold mining destroys land and requires immense resources for processing equipment, transport and custody.
Gold is Lame
If gold was going to a party, it would show up 30 minutes early, only talk about its favorite Seinfield episodes and sport pleated khakis.
My generation (I’m 28) last thought of gold when Pirates of the Caribbean came out in 2007. It’s safe to assume younger generations think of gold even less. If bitcoin becomes the new digital gold, it will likely take years for this transformation to occur. It’s the Millenials & Gen Z that will drive this investment thesis. Does the younger generation even care to have gold, a digital gold?
The Bitcoin blockchain utilizes a low-level programming language that excels at one thing: maximally securing a ledger that tracks bitcoin account balances. Other, more expressive blockchain networks like Ethereum enable users to ideate, create, and deploy an infinite range of applications via smart contracts. Bitcoin = TI84 calculator; Ethereum = a computer.
If society adopts a digital store-of-value, is it more likely to be a digital replica of an archaic system or a programmable, expressive asset?
Note: Bitcoin is exploring smart contract and scalability (e.g. lightning network) solutions to enable more use cases, but I (subjective!) haven’t seen anything convincing.
Long Term Security
This section deserves its own post, so I’m going to over simplify. Bitcoin incentivizes miners to mine via block rewards (new bitcoin issuance) and transaction fees (fees paid by users to process transactions). This revenue is rewarded to the first miner to successfully “mine” the next block (occurs every ~10 minutes).
Miner revenue is the security budget that pays for the Bitcoin military. Miners provide processing power (hash rate) that protects the Bitcoin blockchain. Without an adequate security budget, this hash rate will decrease: reducing Bitcoin’s security.
The block reward (new bitcoin issuance) is a “subsidy” that halves every ~4 years. At Bitcoins launch, the block reward was 50 tokens. Today’s block reward is 6.25 tokens. Satoshi Nakamoto designed this decreasing block subsidy so that:
bitcoin has a fixed max supply of 21 million units. This fixed cap removes the ability for bitcoin to be devalued via further issuance.
new issuance subsidizes security in the early stages of the Bitcoin network. If adoption is sufficient, transaction fees will efficiently replace the subsidy.
By 2032, over 99% of bitcoin will be issued/mined. Remember, there will never be more than 21 million bitcoin.
Transaction fees have historically represented 1.0% to 10.0% of miner revenue.
At least 90% of Bitcoin’s security budget is at risk unless activity (aka, transaction fees) drastically increases. Miners will not be willing to spend money on equipment and electricity if mining isn’t profitable.
Note: Bitcoin (the asset) could migrate to another blockchain, and Bitcoin (the blockchain) could adopt an inflationary policy, move to PoS, or adjust how transaction fees are rewarded. Multiple options exist if Bitcoin’s transaction fee revenue is not an adequate long-term security budget. Could the Bitcoin community agree on an update, and would it materially detract from Bitcoin’s “immutability” meme?
Inertia
Inertia can be more persistent and resilient than gravity. Will inertia stop or significantly inhibit Bitcoin’s rise as a new replacement to gold? The first free web-based email service, Hotmail, was launched in 1996, yet my insurance company still sends me bills via the mail 25 years later. Inertia is real.
“Software is eating the world” and “every company is now a tech company” are one-liners you’ll often hear in board meetings, VC conversations and every inspiring tech Twitter thread. Will society’s unyielding path towards digitization lead to the adoption of a new, digital gold?
Gold is a shared narrative, and it’s starting to feel like it’s stuck on VHS tapes when the rest of the world is streaming.
Thanks for reading, and see you next time!
Garrett
**This is not investing advice. I’m simply highlighting that crypto is worth learning. All investment decisions are up to you**
I love gold! The look of it! The smell of it! The taste of it! The texture! I love gold so much that I lost my genitalia in an unfortunate smelting accident.