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Monday, February 10, 2020

Digital Gold, Scarcity, and Bitcoin Halvings

By Mike Co

What gives money value? Today, the value of a dollar is not directly tied to the value of any other asset. Not so long ago, money was directly pegged to gold. Until 1971, one ounce of gold was redeemable at a fixed value of thirty five dollars in the U.S. Yet for governments that hoped to increase money supply for spending, the gold standard was restrictive. Gold is scarce and governments can’t simply produce more to satisfy political goals. As a result, the gold standard was abandoned by the U.S. in 1971, and the dollar became a fiat currency without a direct peg to gold. Since then, the dollar’s value has declined, and gold has risen from a fixed $35 per ounce to over $1,500 today.

Gold has been a historic store of value primarily because of its scarcity. It’s estimated that you could fit all of the gold ever mined, 190,000 tons, into a box that is only 65-feet wide. If tomorrow, a very hypothetical asteroid the size of that gold box were to crash into the Earth, the value of gold would also crash. While gold is shiny and can be useful in electronics, so are other metals like copper. Yet copper is worth a tiny fraction of the value of gold; There is an inverse relationship between elemental scarcity and commodity value. Gold is very scarce, comprising only 0.00000031% of the Earth’s crust while costing over $1,500 per ounce.

Gold’s scarcity has been the foundation for a total market cap that exceeds $7 trillion, with demand by global financial institutions, individuals, and central banks¹. Now, imagine for a moment that there was a base metal as scarce as gold with one special property:

  • Can be transported over a communications channel

These are the words of Satoshi Nakamoto, the mysterious creator of Bitcoin posting in an online forum in 2010. Could something with this property ever become a store of value to rival gold? Ten years ago, curious internet citizens visiting that forum, called Bitcointalk², would answer such questions with wild and thoughtful speculation. Ten years later, the answer is proving itself in a way that only the most fervent believers would have ever imagined.

In 2013, one bitcoin could buy a mere .01 ounces of gold. At the time of writing, one bitcoin can buy over 5.5 ounces of gold, at a current Bitcoin price of ~$8.5k. Even compared to gold, bitcoin’s value has significantly increased this past decade. Bitcoin is scarce like gold. Producing new bitcoin requires a great deal of work (aka “proof of work”) by a process called mining. So in order to fully understand bitcoin’s scarcity and how new bitcoins are produced, one must understand bitcoin’s monetary policy:

Since creation, Bitcoin has precisely a maximum supply of 21 million coins. Today, approximately 18 million bitcoins exist and new bitcoins are supplied at a rate of ~3.6% annually. Nearly every ten minutes, when miners process a new block, 12.5 new bitcoins are minted. May 2020, in an event called the “Halving”, new bitcoin issuance will drop to 6.25 new bitcoins minted every ten minutes. Halvings are programmed to occur nearly every four years, and May 2020 will mark bitcoin’s third halving.

Bitcoin is secured by mining, which validates and timestamps transactions. The higher the mining hash rate, the more computing power is needed to compromise Bitcoin’s network. One might assume that fewer miners would secure the network as the mining reward successively drops after each Halving. However, the economics of Bitcoin tend to be resilient and self-balancing. After two halvings in the past that limited rewards to miners, mining power (aka hashrate) has recently reached all time highs. Or in other words, as bitcoin’s supply has edged toward its 21 million limit, network security has increased in parallel (log).

Mining ensures that Bitcoin maintains an array of distinctions over gold. While we have best estimates, no one knows with perfect certainty how much gold exists above ground; There is no way to independently verify the total gold supply. With bitcoin, anyone with even the simplest computer, such as a Raspberry Pi, can verify the entire bitcoin supply in existence.

Further, if you buy a gold ring, you have no easy way to independently prove its purity. According to Reuters: “Fake gold bars — blocks of cheaper metal plated with gold — are relatively common in the gold industry.”³ While there are machines that can verify small quantities of gold, they are expensive and difficult to operate.

Being able to independently verify bitcoin is called running a full node. Imagine if a gold purity machine could simultaneously verify a public record of all gold transactions ever made in history. Currently, there are over 52k nodes operating in 96 countries to verify Bitcoin’s network.

Further, any full node can verify that in 2020 Bitcoin’s new supply will drop to an annual rate of ~1.7%. A term known as stock to flow measures the new supply rate over total supply: If the total stock above ground is ~190,000 tons, and new gold is produced at a flow of 3,260 tons⁴ per year (a.k.a. an annual inflation rate of 1.7%), it would take ~58 years to reproduce the existing stock. When Bitcoin’s new annual supply rate is 1.7% after the next Halving, bitcoin’s stock to flow will also be ~58. Gold’s stock to flow is higher than any other metal commodity, and bitcoin is set to soon follow.

While stock to flow is an interesting lens to measure scarcity, it accounts for only one half of the equation determining value. Demand is as important as supply, and stock to flow value forecasts will certainly fail if bitcoin does not possess useful qualities beyond supply scarcity. Not to mention, quantitative forecasts of any kind could fail in the reality of obstacles such as bitcoin volatility.

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 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).

This past decade, Bitcoin’s value in gold has risen significantly amid surging global economic uncertainty. Gold, and bitcoin, are safe havens from fiat currency devaluation, which historically tends to be incited by surging government debt. Armed with a myriad of technological advantages, accelerating development, and maturing global market, Bitcoin is a store of value to rival gold in the digital age.

Thanks to Max Bronstein for review.


  1. Top global central bank gold reserves have been growing since the 2008 Financial Crisis, led primarily by Russia and China.

2. BitcoinTalk: “Re: Bitcoin does NOT violate Mises’ Regression Theorem” (August 27, 2010)

3. Reuters: “Exclusive: Fake-branded bars slip dirty gold into world markets” (August 27, 2019)

4. Statista: “World Gold Production” (March 14, 2019)

5. Coinmetrics.io

6. Blockchain.com Block Explorer

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Digital Gold, Scarcity, and Bitcoin Halvings was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

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