Welcome to Episode 144 of Special Situation Investing.
As a vacationing teenager I used to marvel at the incredible beach houses that lined the coast of California. But as awestruck as I was then I knew that the homes were overpriced, since you could buy a similarly sized home back in Arizona for a fraction of the cost. Returning to those same California beaches decades later, however, I began to rethink my youthful calculations. The California beach houses were still highly sought after all those years later and the valuations were still sky high. Your return on investment would have been much better buying the overpriced beach house in the 90s than if you'd bought the reasonably priced home in a Phoenix suburb.
What I didn’t understand as a teenager was the value of of owning a superior and scarce asset. The highest quality property located on scarce beachfront was always going to be worth more than a cookie cutter plot of land with a standard home in the middle of the desert. Based on that reasoning it follows that a superior asset, which is also more scarce than a competing asset, will eventually trade at a superior valuation.
Bitcoin is comparable to gold in terms of scarcity, divisibility, security, store of value, and yield generation. By market cap gold commands nearly ten times the value of bitcoin with gold at $19.8 trillion and bitcoin at $1.9 trillion. As bitcoin adoption continues during the next decade the disparity between the two assets should disappear leaving bitcoin with at least the same valuation as gold.
Properties of Gold Compared to Bitcoin
Scarcity: Gold is scarce due to its limited natural supply, with an estimated 244,000 metric tones mined and discovered throughout human history. But new gold reserves are continually being discovered and gold is, in theory, available beyond our own planet making its final supply cap unknown. Bitcoin, however, has an absolute fixed supply cap of 21 million coins, making it even more scarce than gold. Unlike gold, no additional bitcoin can ever be created making bitcoin the scarcest of all financial assets.
Divisibility: Bitcoin is far more divisible than gold. A single Bitcoin can be divided into 100 million satoshis, allowing for microtransactions. Gold, by contrast, is much harder to divide without incurring additional costs related to melting, shaping, and assaying of the metal.
Security: Gold’s security is based on its physical durability and resistance to corrosion, but it can be stolen, confiscated, or counterfeited. Bitcoin, on the other hand, is secured by cryptographic encryption and decentralized blockchain technology, making it resistant to fraud, seizure, and censorship. Furthermore, golds physical nature results in proportionally higher storage costs than those incurred by a digital asset such as bitcoin.
Store of Value: Gold has maintained its purchasing power over centuries due to its physical properties and historical role as money. Bitcoin, often called “digital gold,” exhibits similar characteristics, particularly its resistance to inflation and ability to function as a hedge against currency devaluation. As market participants come to understand its superior properties, bitcoins role as a reliable store of value will strengthen.
Yield Generation: Unlike gold, bitcoin offers investors the possibility of yield generation. As bitcoin lending markets develop everyone from the individual bitcoin holder, to institutions, to ETF managers will have the option to generate a yield on their bitcoin. Gold investors do not have the same opportunity to generate yield on their holdings and in fact typically pay others a high fee to secure their assets.
Miscellaneous: Bitcoin is a purely monetary asset as compared to gold and silver which have uses outside of financial markets. The non-monetary uses of commodity money create valuation distortions that don’t exist in bitcoin making bitcoin superior as a purely financial instrument.
Bitcoin miners benefit power grids as purchasers of interruptible power. Grid pricing benefits from the energy expended on bitcoin proof of work security as miners purchase power that would otherwise be produced but not used. Gold and silver miners on the other hand demand power to mine that would not otherwise be needed. In short bitcoin serves the grid where other forms of mining create additional demand.
Perhaps the only area where gold shines brighter than bitcoin is in a grid down or wide scale internet outage. Gold works after an EMP where bitcoin may not. To that I would say that it doesn’t hurt to have some gold, silver, cash or even booze and cigarettes around for the zombie apocalypse. In that event bitcoin may not be your go-to asset but neither will your stock, bonds, or bank accounts either. There is nothing wrong with having assets that serve a purpose that bitcoin can’t provide but it does not follow that because bitcoin won’t work without the internet that its current risk reward profile isn’t superior to gold.
Bitcoin vs Gold’s Market Cap
As more investors recognize bitcoins advantages over gold, its market capitalization should increase and eventually equal that of golds. After all, why should a superior asset trade at a lower market cap than an inferior asset once its properties are well understood? An asset that went from no value to exceeding the market cap of silver in under 15 years, even if its growth slowed considerably, could easily 10x to golds valuation over the next decade as investors come to properly value its superior characteristics.
Current Market Cap (as of February of 2025)
Silver - $1.8 trillion (estimated)
Bitcoin - $1.9 trillion
Gold - $19.8 trillion (estimated)
Note: Interestingly, the very fact that silver and gold have estimated market caps further illustrates the superiority of bitcoin. Bitcoin can be totally and completely audited 24/7 365 on a transparent blockchain and requires no estimation of its value, supply, or trading volume.
Bitcoin Will Provide Superior Returns
If bitcoins market cap grows to match that of gold, it will significantly outperform gold as an investment over the next decade. Gold provided investors with a 5-7% return, depending on the time frame measured, in the past and will likely continue to do so in the future. For the purpose of this example, however, we will assume a constant market cap for gold while calculating the return of bitcoin as its market cap grows to match that of golds. In reality, both gold and bitcoin will likely increase in value over the next decade but bitcoin, having started from a lower base, will compound at a greater rate.
Using a future value of $19.8 trillion and a current value of $1.9 trillion over a period of 10 years results in a compound annual growth rate of 26.4% for bitcoin. This is an excellent return by any measure let alone for a, thus far, non yielding asset.
Conclusion
Bitcoin is the equivalent of the prized California beach house. It is more scarce than gold and improves on many of golds monetary qualities. Bitcoin is absolutely scarce, precisely and easily divisible, provides better and superior security, and better acts as a store of value. Additionally, bitcoin offers investors the possibility of future yield generation through lending, a proposition not available to gold owners. Assuming the traits outlined above are accurate of both bitcoin and gold then there is no reason the two will not command the same valuation in the market at some point in the future.
With that we hope you enjoyed the show. We’ll see you all in two weeks with a writeup on another topic.
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