Market Cap and Turnover

More gold is traded daily in London than is produced through mining in a year, so more than 300 years of production is passed around in the London gold market every year. Given that gold production has greatly increased over the last hundred years, we can estimate that it takes about three years to pass around all the gold ever produced, just in London. That's how liquid the gold market is.

On the other hand, we have trading volumes for Bitcoin at BitStamp in the US. They have averaged half a billion dollars a day over the last two months, which means that it will take about 2000 days to turn over Bitcoin's entire market cap of one trillion dollars at that exchange at current volumes. That's about six and a half years.

Gold has been used as money for about six thousand years, while Bitcoin has just celebrated ten years of existence, so if we use mining time as our measure, turnover of gold in London is more than one thousand times that of Bitcoin at BitStamp. We get this by noting that turnover relative to total production is two times bigger in London, and that total production took more than five hundred times as many years. Two times five hundred is one thousand.

Some may say that this is a little contrived, and I would agree. However, there's something to the saying that time is money. Time represents opportunity cost. People could have done something else. The fact that people have spent six hundred times more time looking for gold than tending network computers looking for Bitcoin should not be forgotten. One thousand times more sweat and labour is being passed around in London than at BitStamp, yet the market cap of gold is only eight times that of Bitcoin. We get this by multiplying the conventional estimate for the world's above ground gold reserve with 50 dollars per gram. That is 160,000 metric tonnes, or 160,000,000,000 grams times 50, which gives us 8 trillion dollars.

All of this is based on a popular measure used within the Bitcoin community itself, namely that Bitcoin has value through opportunity cost in terms of resources spent. I don't think that's a very good measure of value, but when used as our base for calculations, Bitcoin comes out very expensive relative to gold.

Another concerning issue related to Bitcoin's relatively young age is that Bitcoin hasn't had much time to disperse into the population at large. Gold has had 600 times more time to circulate. Just about every family on the planet owns at least some gold. Even very poor people own a few grams in the form of a gold ring or two. Considering that we get 20 grams of gold per person if we take the total above ground reserves and divide it by a world population of eight billion, we find that gold is very well distributed. Any middle class family can put aside enough gold to get their allotted average, and it would only take three years for everybody to do so at current turnover volumes.

All of this is very different for Bitcoin. Hardly anyone owns any Bitcoin. It's still largely in the hands of a few whales, and it would take years to rectify this. That's a lot of time for something that's only ten years old. Furthermore, such a reallocation would greatly enrich a few whales at the expense of everyone else. The process would have the characteristics of a tax where people hand over hard earned resources to a small group of people who spent very little time amassing their holdings.

If we were to take half the market cap of Bitcoin, and divide it over the biggest Bitcoin whales, we're not likely to get more than a few hundred individuals. However, if we do the same for gold, we get all the central banks in the world plus thousands of institutions and millions of individuals. No wonder then that turnover in gold is greater than turnover in Bitcoin. A nagging suspicion also arises, namely that the turnover in Bitcoin is largely internal to a few individuals. The turnover doesn't reflect redistribution. Rather, it's just Bitcoin washing around internally, with very few new owners. Unlike the gold market, with millions of jewellery stores all over the world, Bitcoin has virtually no retail participation.

This means that something very dramatic may happen to the price of Bitcoin. The bottom can drop out. All it would take is for a few whales to decide to cash out at the same time, and that could easily happen if interest rates were to go up, because some whales, if not most of them, have taken on debt in order to hold onto their coins. Furthermore, there's the ever-present drain on the Bitcoin community through Bitcoin's constant need for energy and computer equipment, so who's going to step in to buy the day whales and miners are forced to sell?

The answer to this question when it comes to gold, is that there are no whales, and any forced selling by miners poses no threat since they represent a miniscule part of the total gold market due to the fact that gold has been mined for 6000 years rather than just 10 years. Furthermore, there's no lack of retail outlets in the form of jewellery stores, and the majority of gold owners are debt free. There will always be retail interest in gold.

People need gold for all sorts of reasons. Gold rings are in most cultures a minimum requirement for marriage. Gold is used in computers and medical equipment. There are real world uses for gold, and that represents a permanent demand. This is not the case for Bitcoin. Retail investors are speculators with no real need for their lottery tickets. Such people vanish the moment they sense desperation by sellers. Bitcoin can suddenly go bid-less. That will never happen to gold due to its many real world uses.

Whale

By Michaël CATANZARITI - by Michaël CATANZARITI, CC BY-SA 3.0, Link