Bitcoin Is Exactly Like Gold Except When It Isn’t

LAGOS (Capital Markets in Africa) – Bitcoin has been described as digital gold. The phrase digital gold may be a brilliant and highly informative metaphor, a cynically clever sales trick (a form of associative and repetitive priming) intended to boost bitcoin trading by naïve investors or, perhaps, an indication of the futility of explaining the utility of bitcoin. Elmandjra (2020) embraces the concept of bitcoin as digital gold and enthusiastically recommends bitcoin investment while Furman and Hatzius (2020) find both bitcoin and gold unappealing noting “that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients”. Winklevoss (2020) argues that as the appeal of bitcoin grows bitcoin will increasingly be seen as “gold 2.0” and that the market values of all the existing gold and bitcoin will converge. If the value of all the bitcoin and gold ever mined converged, then the price of bitcoin could rise from about $19,000 to over $600,000. However, Walden (2020) suggests that many see bitcoin as a store of value and that bitcoin’s value comes from a “network effect”, not from comparisons to gold. A network effect framework, Metcalfe’s Law, can superficially explain the empirical “bandwagon effect” correlation between the price of bitcoin and the number of bitcoins mined. The empirical current “fair” price of bitcoin is about $12,000 and the 2140 “fair” price is about $74,000.

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