What makes bitcoin scarcer than real estate or gold?

Hard assets are back in vogue as central banks in countries like China, Russia, India, and Turkey are buying large quantities of gold. In just the first quarter of this year, it is estimated that central banks purchased 145.5 metric tons of gold, a 68% increase over the same period in 2018. We've also seen legendary investors like Ray Dalio, founder of the world’s largest hedge fund, recently recommending that people increase their exposure to gold. Not surprisingly, the price of gold is up approximately 16% over the last five months.

We have centuries of data on the value of gold and its traditional role as a store of value and safe haven. Its physical nature and the myriad of proven uses for gold beyond serving as just a store of value (e.g., jewellery, industrial) make it more complementary than competitive to bitcoin in our view. In other words, we do not see being bullish on both gold and bitcoin as mutually exclusive.

We do not see being bullish on both gold and bitcoin as mutually exclusive

However, it is important to highlight a crucial difference between bitcoin and gold, which is the supply dynamics of gold aren’t fixed.

As its price rises, gold that was previously unprofitable to mine can be brought to market. The resulting increase in the supply of gold can act as a check on further gold price increases.

Traditional hard assets are vulnerable to price deflating supply shocks

This same supply dynamics for gold (higher price => increasing supply => downward pressure on prices) is at work for silver and every other traditional hard asset. Even the available supply of occupiable real estate can be increased, with examples ranging from the conversion of single-family homes into multi-family dwellings that regularly occurs today, to more exotic and futuristic schemes.

Physical commodities have also historically been subjected to unanticipated supply increases (sometimes referred to as “shocks”) that have deflated prices. Examples include the discovery of large quantities of gold in the late 19th century in South Africa and European exploration and conquest in South America in the 1500s, both of which put downward pressure on the price of gold.

Looking much further ahead, an extreme supply shock could take place with mining asteroids that are laden with precious minerals like gold.

An unlimited supply of gold, but a finite number of bitcoin

Contrast gold’s ever increasing available supply with bitcoin, which has a hard cap of 21 million units (“coins”). Bitcoin’s software protocol, first publicly introduced 11-years ago this month, governs a fixed and algorithmically deterministic total supply that, in stark contrast with gold, is unaffected by price changes.

What bitcoin’s finite supply means is that once someone owns a certain percentage of the total supply of bitcoins, that person will always own at least that percentage. Bitcoin is the only significant asset in history with this property, and its reliably finite supply is the reason why bitcoin is the world’s hardest asset.

Bitcoin’s finite supply is an incredibly powerful feature. Once a person owns a certain percentage of the total supply of bitcoins, that person will always own at least that percentage.

The “halving”: why new bitcoins become scarcer over time

While the number of bitcoins in existence continues to grow at present, approximately 86% of all bitcoins that will ever exist have already been created (18 million of the 21 million total coins exist today). Today, the existing supply of bitcoins is growing at less than 4% per year, and over the next decade the growth rate will continue declining and drop below 1%.

This slowdown in the creation of new bitcoins occurs because of a foundational rule coded into Bitcoin’s software that is referred to as the “halving” (or “halvening”), where approximately every four years the number of new bitcoins “mined” into existence every ~10 minutes is cut in half.

The next such halving is forecast to occur next year in mid-May, when the mining reward will be further constricted from the current 12.5 new bitcoins created every ~10 minutes to just 6.25 new bitcoins created every ~10 minutes (Figure 2).

Hard Assets

The world’s ‘hardest’ asset is ironically virtual