Don’t be fooled by headlines saying bitcoin’s value nearly 3 times gold

Shop
attendant Aya Ito holds gold bars at a jewellery shop in
Tokyo.
Reuters

America’s favorite cryptocurrency is back at it again. Just days
ago, and less than a week after splitting into two separate currencies,
bitcoin and bitcoin cash, bitcoin rocketed higher to a fresh
all-time high of $3,525.

This new record high means that, at one point at least, bitcoin
was up 264% from where it began the year, and that its market cap
well exceeded the $55 billion mark.

Why bitcoin just catapulted to a new record

Why the sudden surge in bitcoin after the digital currency was
valued as low as $1,900 on July 16? A lot of the recent
bullishness has to do with the upgrades that were enacted in the
software for bitcoin.

The aforementioned split into two separate currencies was a
result of a majority of the community wanting to go with a
software upgrade known as BIP 91, and a minority (but a large
enough minority that no accepted consensus could prevent the
split into two currencies) opposed to it, because it would lower
transaction fees for bitcoin miners. BIP 91 introduced
SegWit2X, which will move some of the data that’s currently
within the blockchain (the decentralized digital ledger that logs
transactions) out of the main bitcoin network. The idea here
being to increase capacity, improve transaction times, and lower
transaction fees.

It’s also believed that SegWit2X could be the tool that allows
bitcoin to compete more effectively with ethereum for enterprise
customers. The Enterprise Ethereum Alliance already has more than 150 organizations testing ethereum’s
blockchain in various pilot and small-scale situations, and some
people within the bitcoin community who favored SegWit2X want to
see bitcoin appeal to enterprise customers. 

Bitcoin is worth nearly three times more than an ounce of
gold

There have also been some macroeconomic reasons why bitcoin has
rallied so aggressively. A really good example has been the
falling U.S. dollar. A falling dollar is great news for President
Trump, because it makes American goods seem more attractive to
foreign countries, thusly boosting exports. Unfortunately, it
doesn’t make U.S. investors all too happy to see their currency
devalued. Investors may rightly be looking for a place to park
their money so it doesn’t lose its value relative to other
currencies. Gold has traditionally been a safe-haven where
investors will flock when the dollar falls, but bitcoin has also
been a popular choice recently.

In fact, headlines are abuzz with the fact that bitcoin has
galloped considerably higher than gold of late. While bitcoin was
busy crossing $3,500, gold was valued at roughly $1,260 an ounce.
Various outlets reporting on the bifurcation between these two
assets have noted that bitcoin was valued at “nearly three times
more than an ounce of gold.” 

But this only tells part of the tale. If we scratch below the
surface, gold is still the kingpin of all safe-haven investments,
and it’s likely to stay that way for a long time to come.

Introducing relativity

Within the stock market, everything is relative. If I asked you
which company has a higher market cap: Sirius XM
Holdings with a share price of $5.55, or
Whirlpool with a share price of $175.05,
which would you choose? Whirlpool, because it has a $175 share
price? If so, you’d be wrong. Sirius XM’s market cap is twice as
large. The reason is share price only tells us part of the story.
We also need to know how many shares are outstanding to calculate
the overall value of the asset. Price is relative to the number
of shares outstanding.

Likewise, bitcoin’s price and gold’s price are relative to the
assets that can be mined. In this case, bitcoin’s protocols
limits the number of coins that can be mined to 21 million. As of
Aug. 7th, there were 16,496,625 bitcoin mined, per
Blockchain.info, leading to a market cap, at bitcoin’s peak, of
$58.2 billion. There’s no mistaking that this is a far cry from
where it was valued just two years ago.

Now, let’s take a look at gold. In 2013, BBC reported that
Thomson Reuters GFMS had issued their latest report predicting
that there were 171,300 tons of gold in the world. Since
there are 32,000 ounces per ton, we’re talking about an estimate
of 5.481 billion ounces of gold either mined already or still in
the ground. Mind you, this estimate is on the low-end compared to
a handful of other reports, some of which claimed as much as 2.5
million tons of gold could be found on Earth. Based on a $1,260
per ounce price for gold, we’re talking about an implied value of
$6.91 trillion dollars using Thompson Reuters’ figures.

If we were to divide the implied value of the gold market by that
of bitcoin, we’d see that the gold market is worth about 119
times that of bitcoin. Sure, it may be three times the value of
gold on a per ounce basis, but gold is a metaphorical skyscraper
and bitcoin a hot-dog stand if we lined them up next to each
other.

Choose bitcoin over gold? No thanks.

Additionally, while bitcoin has protocols that could, in theory,
be adjusted to allow the mined base to increase over time, gold
can’t be created out of thin air. It is truly a finite asset,
which is why it’s often sought after by investors when the U.S.
dollar devalues.

While bitcoin is liable to remain volatile as it attempts to
carve out a niche in terms of usability, gold also has centuries
of history where it’s been used as a currency. It also has
real-world functionality, being used as a conductor of
electricity and for other industrial and jewelry purposes.
Bitcoin has few real-world uses at the moment.

As I said, everything is relative. This Fool believes it would be
unwise to choose bitcoin over gold or gold stocks at this point
— but that’s just one investor’s opinion.

Sean Williams has no position in any stocks
mentioned. The Motley Fool has no position in any of the stocks
mentioned. The Motley Fool has a disclosure policy.

Get the latest Bitcoin price here.

Read the original article on The Motley Fool. Copyright 2017. Follow The Motley Fool on Twitter.


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