The Battle of Bitcoin versus Gold

The argument that Bitcoin has the potential to take over from the precious metal gold as a store of value continues to rumble on. Already this year, Goldman Sachs has weighed into the debate with Zach Pandl, Goldman’s co-head of foreign exchange strategy, sending a note to clients this week, saying Bitcoin can take market share from gold over time as a “byproduct” of more adoption, along with the potential from “Bitcoin-specific scaling solutions.”

Pandl also wrote, “Hypothetically, if Bitcoin’s share of the ‘store of value’ market were to rise to 50% over the next five years (with no growth in overall demand for stores of value) its price would increase to just over $100,000, for a compound annualized return of 17-18% (accounting for growth in Bitcoin supply over time).” 

It is estimated that public ownership of gold as an investment stands at around $2.6 trillion, Bitcoin’s market capitalization is currently just under $700 billion, and Pandl said that from these figures he concluded that Bitcoin currently commands an approximate 20% share of the “store of value” (gold and Bitcoin) market.

Bitcoin options

Goldman Sachs has been making quite bullish noises about Bitcoin and cryptocurrencies. In December last year it made a statement saying that the next major development for cryptocurrencies will be more liquid options markets as more traditional financial firms pile into the rapidly growing asset class. Andrei Kazantsev, Goldman’s global head of crypto trading, said, “We are seeing a lot of demand for more derivative-type hedging. The next big step that we are envisioning is the development of options markets.”

In December, open interest in bitcoin options, or the total value of outstanding contracts, stood at about $12 billion as of the latest data from Skew, a subsidiary of Coinbase that tracks data on cryptocurrency derivatives markets. This is a considerable increase over 2020 when the market rarely exceeded $2 billion. Kazantsev says the cryptocurrency derivatives market is still in its infancy, but that Bitcoin options were growing at speed. Essentially, options are a type of financial instrument called a “derivative,” which obtains its value from the price of another asset – in this case, the underlying cryptocurrency. Increasingly investors are using cryptocurrency options to hedge out existing risk or take on additional market exposure.

Bitcoin to $100k

But back to Bitcoin versus gold. It is interesting that in April of 2021, Goldman Sachs doubted Bitcoin could become a store of value, saying it had environmental problems, competition from other cryptocurrencies and “lack of real use.” Back then its top commodities strategist Jeffrey Currie said, “Traditional long-term stores of value such as gold, art, diamonds, wine and collectibles all have value and use beyond being stores of value,” and asserted, that Bitcoin’s lack of real uses and its environmental problems make it “vulnerable to losing store-of-value demand to another, better-designed cryptocurrency.”

It seems that after reinstating its Bitcoin trading desk and reporting huge institutional demand for BTC, the Wall Street giant has changed its tune about Bitcoin’s potential as a store of value and that this could send its value to $100,000.

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