Blog 02: Improving Gold
Bitcoin Valuation Framework Series.
This post is part of a multi-part series designed for relative newcomers to bitcoin who are hoping to better-understand various bitcoin valuation frameworks. Today’s post explains the comparisons between bitcoin and gold that informs Cantilever’s long- term (10-year) bitcoin valuation framework. At the core of this framework is Cantilever’s evaluation of bitcoin as compared with a basket of global store of value (“SoV”) assets. Nothing in this post—or any other post on the blog—is intended to serve as investment advice. Much of the public discourse around Bitcoin focuses on its role as digital peer-to-peer cash. And for good reason: it was this aspect of Bitcoin that its creator Satoshi Nakamoto emphasized most in his seminal Bitcoin whitepaper. In the decade since its creation, Bitcoin has already developed the necessary technological capability to seamlessly serve as payment rails in certain niches in the global economy. In perhaps the most celebrated example of Bitcoin’s use case as digital currency, it now is accepted as legal tender in the sovereign nation of El Salvador, but the focus on Bitcoin’s potential to become a widely-adopted digital payment system might serve to obscure what Cantilever believes is Bitcoin’s most viable long-term use case: a “store of value” asset akin to gold.
Throughout human history, investors and savers alike have placed tremendous value on assets that preserved purchasing power over time; these are commonly referred to as “store of value” or “SoV” assets. SoV assets all share a common characteristic: their scarcity. Scarcity is a commonly-misunderstood term; just because there are few of something does not make it scarce. In order for scarcity to exist, demand must outstrip supply. In today’s financial system, SoV assets in the financial markets that are perceived to share this trait of scarcity are gold, US Treasuries, real estate, as well as other niche markets such as fine art.
In the current economic climate, with inflation running at near unprecedented levels, SoV assets are coming into higher demand as purchasing power in global fiat currencies (like the USD, Euro, Yuan, etc) is eroding at an increasing rate. In this environment, bitcoin’s (the asset) utility is increasingly attractive. Indeed, through its novel innovation that caps supply at 21,000,000, bitcoin is arguably the world’s first absolutely scarce asset (more on this later).
To understand bitcoin’s potential to become the world’s scarcest SoV asset, understanding gold’s use case as a global reserve asset is a helpful introduction. Gold has served as a global monetary good for thousands of years. Ever wonder why? Without running deep down the “What is Money” rabbit hole here, gold was selected by the free market as a superior monetary good because it optimized across 6 key characteristics of store of value: durability, fungibility, divisibility, verifiability, portability and (especially) scarcity. Due to these characteristics, gold has repeatedly been utilized as a reserve asset within numerous monetary systems, with the most recent being the Bretton Woods system that existed from 1945-1971.
However, while scarcer than most other assets and commodities, even gold has an inflation rate—roughly 2% per year. This is because gold continues to be mined from below the Earth’s crust, which then slowly is added to the above ground stock. Gold has, and continues to be, recognized as an apolitical SoV monetary asset, and carries a total market capitalization of over $10T as of this writing.
Bitcoin is commonly referred to as “digital gold” and the comparison is an apt one. When assessed against other assets such as cash, stocks, or bonds, both gold and bitcoin are comparably much more scarce. However, what bitcoin has that gold does not is the feature of absolute scarcity discussed above. Because there will never be more than 21,000,000 bitcoins in circulation, it is arguably the world’s only absolutely scarce asset. Furthermore, given its digital form factor, bitcoin also arguably is preferable to gold in the other key store of value characteristics of durability, fungibility, divisibility, verifiability and portability. How does this framework apply to bitcoin valuation and its resulting price? You will recall that gold’s current market capitalization sits around $10T USD. One approach to valuing bitcoin is to make a series of assumptions of what percentage of gold’s market capitalization will port into bitcoin over time given bitcoin’s superior overall SoV attributes. Gold’s current market capitalization—i.e., the total value of all gold known to exist—is currently around $10 trillion. If bitcoin were to attain just 50% of gold’s market capitalization, bitcoin as an asset class would be valued around $5T. If we divide this number by bitcoin’s terminal supply of 21,000,000, it would yield a price of ~ $235,000/bitcoin.
Over the next ten years, Cantilever’s “Base Case” (80% probability) for bitcoin is that it will attain 75% of gold’s market cap, which equates to a bitcoin market cap of $7.5T and bitcoin price of ~$350,000 per bitcoin.
In future Bitcoin Valuation Framework posts, we’ll explore other frameworks from which bitcoin can be valued to include a similar comparison between bitcoin and US Treasuries (approaching $30T), bitcoin in context of global store of value assets, and bitcoin network effects.