Gold Versus Bitcoin, Goldman Sachs Prefers Metal to Crypto

Markets and Prices

Bitcoin’s creator patterned his digital commodity money after history’s most famous analog store of value for currencies, gold. Debate rages as to whether bitcoin will overtake gold’s place. 

Gold Remains Goldman Sachs’ Refuge

Recent volatility analysis of bitcoin’s “exchange rate means that merchants accepting Bitcoin (who do not, implicitly, want to become Bitcoin speculators themselves) should demand large volatility premia to hedge” against their assumed risk in accepting the world’s most popular cryptocurrency, Goldman Sachs’ Michael Hinds, Mikhail Sprogis, and Jeffrey Currie urge.

Their report, provocatively titled Fear and Wealth, stressed how “a 3-day USD/BTC put option at historical average volatility results in a premium of around 2.3%.” Mr. Hinds, et al, find such a premium to be prohibitive, concluding their outlined barrier “clearly illustrates that Bitcoin as a unit of account and medium of exchange is nowhere near as favourable as it first appears.” Fiat to bitcoin volatility this year stands at more than six times its gold counterpart.
Gold Versus Bitcoin, Goldman Sachs Prefers Metal to Crypto
Metcalf applied to bitcoin transactions and market cap.

Goldman’s Fear and Wealth examines four fundamentals: durability (bitcoin is forever subject to hacks, be they personal, network, institutional), portability (gold weight exposes it to high expense and need for security measures, while bitcoin moves relatively undetected), intrinsic value (existence of alternative cryptocurrencies mean an oversupply), and unit of account (gold’s four-millennia track record means it has conquered volatility). For these reasons “gold wins out over [bitcoin].”

Bitcoin’s Metcalf Future

Business Insider‘s affable Executive Editor, Sara Silverstein, mentioned to she “wouldn’t say I use bitcoin.” Ms. Silverstein has some, but is “not interested in using bitcoin for transactions right now.”
In her new weekly video program, The Bit, she snagged Wall Street bitcoin bull Tom Lee of Fundstrat. Their conversation quickly turned to valuing bitcoin versus gold. Ms. Silverstein knew Mr. Lee “modeled bitcoin’s price based on two different methodologies, and [I] wanted to dig into both of these and talk about the question more generally,” she told

Expanding on his use of Metcalf’s Law, Mr. Lee explains to Ms. Silverstein “if you build a very simple model valuing bitcoin as the square function number of users times the average transaction value, 94% of the bitcoin moved over the past four years is explained by that equation.”

Gold Versus Bitcoin, Goldman Sachs Prefers Metal to Crypto
Sara Silverstein

Also known as the network effect, it can help to understand “Facebook, Alibaba, and Google,” Mr. Lee cited as examples, and their respective increases in utility value. He explains “bitcoin represents a store of value because it’s an encrypted, personal encrypted database, that for seven years hasn’t been hacked.”

That “is a way to store value,” Mr. Lee insists. The nine trillion USD gold market “was [the previous] store of value. I think this next generation of young people view bitcoin as their store of value. And if it captures 5% of the gold market, it’s worth at least $25,000 per unit.”

Calling his price “conservative,” he said it “really reflects the assumption that investors will allocate in their blended portfolio only 5% to alternative currencies. Today, that allocation is much greater,” he explained.

It might be the case investors and adopters will use both gold and bitcoin, revealing either/or debates to be more about blackening bitcoin’s reputation than substantial analysis. Legacy banks usually prefer status quo to radical innovation.

Are you hedging in preference to bitcoin over gold? Tell us your reasoning in the comments below!

Images courtesy of: artsfon, reddit, Business Insider.

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