Digital Gold, Scarcity, and Bitcoin Halvings

Compared to gold, Bitcoin is significantly more volatile. However, Bitcoin volatility is dampening over the years. According to CoinMetrics, average Bitcoin volatility (180d) has declined compared to the first half of the decade: from 6.4% (2011–2015) down to 3.7% (2015–2020).

Gold’s predictable supply, elemental scarcity, and global market has allowed it to become a stable store of value against fiat currency. At the same time, Bitcoin development is accelerating and has already proven a myriad of advantages over precious metal:

• Auditability: Bitcoin nodes ensure the ability to independently verify any bitcoins received, as well as the entire historical ledger.
• Low fees to send internationally: For a current median transaction fee of ~$0.24,⁵ bitcoin can be sent to any user, in any country in the world with an internet connection. In September, a bitcoin transaction valued over one billion dollars was sent for a fee of only ~$700.⁶ The cost to internationally send an equal amount of gold (~640,000 tons) would be exorbitant, requiring armored transport and insurance.
• Privacy: Transferring gold without a third party requires both parties to be physically present, whereas bitcoin peer to peer transactions can be sent digitally and pseudonymously.
• Portability: As bitcoin private keys can be memorized with a simple 12-word phrase, and can be sent digitally, bitcoin is highly portable even in large quantities, unlike gold.
• Divisibility: Unlike gold, which needs to be melted down, bitcoin is easily divisible. You can own or send a fraction of a bitcoin, as well as thousands of bitcoin at a time.
• Scarcity: Bitcoin supply will soon be as scarce as gold while also being more programmatic and predictable.

So what gives assets like gold or Bitcoin value in a world without pegged exchange rates? Valuation requires comparing one asset to another, with varying degrees of volatility. The same holds true for fiat currency itself. The value of a dollar and euro is continuously shifting in a world of floating exchange rates. Across global markets, supply continuously shifts to underwhelm or overwhelm demand for one asset over another. The modern monetary system is dynamic, especially as global central banks increase or (rarely) contract the supply of money.

Economies can sometimes prosper as money supply grows by independent central banks. On the other hand, history is fraught with hyperinflation events such as Germany in 1921–23, Zimbabwe in 2007–09, and Venezuela today. Or in the words of a St. Louis Federal Reserve report on surging U.S. government debt that ultimately warns of hyperinflation, “We live in a world of scarcity — which means that our wants exceed the resources required to fulfill them.” New money supply is not a solution that magically creates more resources. Printing money has a hidden cost for all citizens, as new supply dilutes the value of existing stock.

This economic phenomenon has driven historical demand for gold, especially in times of heightened economic uncertainty. In times of trouble, the temptation to print money is always highest. Gold, due to its scarcity, is a historic store of value against fiat money devaluation. Recently, global economic fear as measured by the Global Economic Policy Uncertainty Index is reaching all time highs, alongside gold’s value indexed against major global currencies (exempting USD).