Bitcoin's True Value: A New Framework
The idea that Bitcoin is like gold, often referred to as 'digital gold,' has been around for a while. This comparison is based on several characteristics shared between the two assets: limited supply, durability, fungibility, and divisibility.
According to the World Gold Council, there are 219,891 metric tons of mined gold in the world with a total market value of around $28.4 trillion. However, not all of this gold is held privately for investment purposes; almost half is used as jewelry, and another 18% is held in central bank reserves.
The figure JPMorgan focuses on is the amount of gold held privately for investment purposes, that is, gold held as a store of value by individuals and investors. This includes all the bars held by gold ETFs, too, since private individuals and other investors ultimately own them. The World Gold Council estimates this to be around 50,978 tons, which brings the total value of privately held gold to $6.6 trillion.
If we divide this by the total number of Bitcoins in circulation (nearly 20.1 million at last count), we get a theoretical price target of around $328,411 per coin. However, JPMorgan makes an assumption that investors wouldn't allocate an equal amount of Bitcoin in their portfolios for store-of-value purposes as they would gold because Bitcoin is much more volatile.
JPMorgan calculates the bitcoin-to-gold volatility ratio and uses it to adjust the theoretical price target. In 2022, this ratio was at 5x, but has since decreased to around 1.32x due to the relatively stable price of gold and decreasing price swings in Bitcoin. This would value Bitcoin at $248,892.
JPMorgan's framework is a good starting point, but there are three key things it doesn't factor in: Bitcoin's utility, its supply dynamics, and its true risks compared to gold. Bitcoin has more uses than gold, including being used as a form of payment, money transfer, and even collateral for lending.
Bitcoin's supply is capped at 21 million, with new coins being generated at half the rate of gold. This scarcity should boost Bitcoin's value over gold by making it a rarer asset. Additionally, JPMorgan doesn't capture the risks associated with Bitcoin, such as quantum computing and exchange hacks.