Part One – by Aaron Koenig
When governments started to react with shutdowns to the alleged Corona Virus pandemic, stock markets crashed massively, as investors are assuming that these measures will lead to a global recession. The Dow Jones lost more points in March 2020 than ever before. To the surprise of many, Bitcoin plummeted along with the traditional asset classes. On March 12, the Bitcoin price fell from about 8,000 USD to less than 4,000 USD – the biggest one-day loss since April 2013.
Some people called this the end of Bitcoin as a safe haven. Wasn’t Bitcoin supposed to be independent of the legacy financial system? Shouldn’t it go up, when everything else is crashing? But it is not that simple. Even the price of gold, the world‘s traditional safe haven, fell from around 1,670 USD to 1,470 USD in the second week of March. Obviously, when people panic, they do not act rationally. They sell everything just to get cash in their hands, even those assets with a high long term potential such as gold and Bitcoin.
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Bitcoin is Scarcer than Gold
However, gold has quickly recovered from its losses and has nearly reached its pre-crash level again. Furthermore, gold is nearly sold out in many shops due to the looming crisis, so one would expect its price to rise even higher. Also Bitcoin has steadily risen since its crash on March 12, approaching the 7,000 USD mark, although unlike gold it is still far below its pre-Corona level of around 10,000 USD.
One has to take into account that for most investors, Bitcoin is still a new and unfamiliar thing. It cannot be expected to perform like gold, with its history of more than 5000 years as a store of value. Bitcoin came into existence only 11 years ago, it is still in its infancy.
Thus, it is too new to be a safe haven for investors yet – but it has the potential to become one in the near future.
Satoshi Nakamoto has designed Bitcoin to be even scarcer than gold. New gold mines may be discovered. In the 16th century, the discovery of South America’s gold mines led to an oversupply and thus to a fall in gold prices. Theoretically, even a meteorite of pure gold could strike the earth and lead to a new glut of gold – extremely unlikely, but not to be ruled out entirely. Such unforeseeable events, however, are impossible with Bitcoin. The maximum amount of Bitcoin is hard-coded to be 21 million.
Bitcoin’s Stock-to-Flow Ratio
The value of precious metals such as gold, silver, or platinum is closely linked to their stock-to-flow ratio, i.e. the ratio of the total amount already mined (“stock”) to the units newly mined every year (“flow”). The higher the stock-to-flow ratio of a commodity, the more valuable it is. Until now, gold has been considered an asset with the highest stock-to-flow ratio. The quantity mined to date is around 178,000 tonnes, with around 2700 tonnes of new gold being added each year. Gold’s stock-to-flow ratio is therefore around 66, which theoretically means that it would take 66 years to mine gold to reach the existing quantity.
If we apply this model to Bitcoin, we see that Bitcoin will be even scarcer than gold in the near future. From the upcoming halving, which is due in May 2020, 6.25 new Bitcoins will be mined every ten minutes, i.e. 37.5 per hour, 900 per day, 328,500 per year. The total amount of all Bitcoins which have been mined so far is about 18.5 million, so its stock-to-flow ratio is 56, almost reaching that of gold. After the next halving, which is expected to take place at the end of 2023, only 164,250 new Bitcoins will be added each year. Bitcoin’s stock-to-flow ratio will then be around 116, clearly outperforming gold. This will continue until the last halving in 2140. Bitcoin’s stock-to-flow ratio will then be many times higher than that of gold.
So far, the stock-to-flow model has explained Bitcoin’s rise surprisingly well. If we extrapolate the previous curve, the Bitcoin price can still go up quite a bit. According to this model, in 2022 we would see a price of 100,000 US dollars per Bitcoin, in the long run even 1 Million USD. However, it will take a while until investors will get to used to the idea of Bitcoin as a safe haven. But it is likely to happen, as Bitcoin is the world‘s hardest money.
To be continued…
Aaron Koenig is a contributor to the Census Blog. He is an entrepreneur, consultant, writer and film producer, specialized in Bitcoin and Blockchain technology. Aaron is the author of the books A Beginner’s Guide to Bitcoin and Austrian Economics, Cryptocoins – Investing in Digital Currencies and The Decentral Revolution