This is not the first time that very optimistic statements have come from financial giants about bitcoin. But this time, the CEO of the world’s largest asset management company has openly declared that he prefers bitcoin. instead of investing in gold, […] bitcoin is an international asset“. In the aftermath, this statement is on the verge of generating a bull market in bitcoin. While stock indices are consolidating, bitcoin is at its year highs. But is bitcoin “digital gold” ? And what are the purposes of this financial giant?
Machination or conviction?
In 2017, Larry Fink, CEO of the BlackRock company, declared that bitcoin was a money laundering tool. This breaks sharply with the leader’s recent remarks. Additionally, BlackRock had conducted indirect investments in cryptocurrency. The company had notably invested $24 million in FTX. A brilliant failure… Now, the repeated words of BlackRock show a clear position against cryptocurrencies. This position is received rather very favorably by the market.
“I think the role of cryptos is to digitize gold, in many ways. Instead invest in gold as a hedge against onerous problems in a particular country. Let’s be clear: bitcoin is an international asset”
Larry Fink (2023), BlackRock recognizes the power of bitcoin (cointribune.com)
This statement also comes after BlackRock announced its desire to create a bitcoin ETF. However, this proposal requires the agreement of the authorities (SEC). But it is clear that this opening in management would have a considerable impact for finance and cryptocurrencies.
In December 2022the CEO of BlackRock also stated: “I think the next generation of markets and the next generation of securities will be the tokenization of securities”. This statement is not neutral. Indeed, some startups already offer tokenize bonds or various securities. The future of finance probably lies in the Blockchain and the exchange of securities on a network of another order. But the Blockchain network is not comparable in traditional finance to bitcoin, whose image is completely different.
Why Bitcoin Is and Isn’t Digital Gold…
This is an important theoretical question. Indeed, bitcoin (BTC) is often represented by a gold coin. This gold coin marked with the seal of bitcoin is revealing of the ambiguity that reigns in the minds of the public. Can bitcoin replace gold? What are the differences and commonalities between the two assets?
Commonalities between gold and bitcoin
The common point between gold and bitcoin lies, a priori at least, in their “limited quantity”. Gold is available in limited quantities underground. Similarly, the quantity of bitcoins in circulation is limited and defined in advance.
Nevertheless, we have never mined as much gold as today. And we’ve never mined as few bitcoins as we do today. The quantity of gold available underground is difficult to estimate and mining companies have significant production capacities. They represent 80% of the offer. The limited quantity of the two active ingredients is therefore an unjustifiable common point.
On the other hand, the fact that both assets require regular mining is quite common. Mining defines the minimum price at which a unit can be sold, assuming the quantity demanded exceeds the quantity supplied.
“Bitcoin velocity is often highest during bitcoin declines. This reflects the idea that the market is approaching the ” right price “, or in any case of the lowest price determined by the cost of production of the miners. Any sale below the production cost of BTC would cause difficulties on the network, and therefore ultimately a systematic return to this level. The now negligible influence of miners is therefore not the cause of the high cost of production”.
On the Issue of Bitcoin (BTC) Supply – Tremplin.io
Consequently, there is indeed, in both cases, a link between the cost of mining and the price observed in the long term.
Differences between Gold and Bitcoin
Nevertheless, bitcoin is still too correlated to stock market indices to be “independent”. In our latest article, we elaborate on the following.
” The correlation between bitcoin and the indices persists over time because the speed of circulation of bitcoin evolves according to the phases of the market. This amounts to writing that as long as bitcoin remains speculative (subject to frequent trading), the role of liquidity is central, and the correlation to indices remains very high. Conversely, the price of gold shows a weaker correlation to the indices, because its velocity also seems weaker.”
Bitcoin remains correlated to indices – Tremplin.io
Although the price of gold is correlated to the indices, the level of correlation is weaker than that of bitcoin in the long term. Therefore, beyond the fact that bitcoin is very volatile, it is very cash sensitive. In fact, the average volatility recorded on bitcoin has been 53% since 2019. It stands at 15% for gold over the same period. That is to say, bitcoin is 3.5 times more volatile than gold!
It follows that it is not reasonable to consider bitcoin as a stable value. It is a conviction value. The instability of bitcoin, and its strong correlation to indices, implies that the latter is divergent from the case of gold. Finally, gold has been around for millennia.
Gold is no longer an exchange value
If gold was the basis of the international monetary system, it hasn’t been since 1971. Prices are therefore no longer expressed or pledged on gold. Moreover, gold is no longer a means of exchange, neither between individuals nor between the nations that balanced their trade. It is now perceived as a store of value and no longer as a means of exchange. In contrast, bitcoin is used as a medium of exchange.
This difference in ownership of the two assets is reflected, as we have shown, in the statistics. In this, gold is a precious metal, which is even (partially) used for productive purposes. It is therefore completely devoid of the purpose of exchange in the 21st century.
The circulation speed of bitcoin is decreasing
The evolution of bitcoin’s circulation speed directly expresses the idea of whether bitcoin is more of a store of value or a medium of exchange. In a previous article, we estimated that in 2022, one bitcoin was traded an average of 0.66 times. This figure is lower than the period 2010-2018, when the average bitcoin velocity was 1.4.
” We will therefore specify that approximately 330,000 bitcoins were mined in 2022. At the same time, an overall annual volume of $357.5 billion traded in bitcoins. With an average price in 2022 of $28,200, we deduce that the approximate number of bitcoins traded is 12.6 million. Ultimately, we deduce that the velocity of bitcoin is therefore close to 0.66 in 2022! That is to say, the velocity of bitcoin is lower than that of traditional currencies”.
On the Issue of Bitcoin (BTC) Supply – Tremplin.io
If we are witnessing an increase in the reserve value of bitcoin, that is to say a decrease in its volatility, the exchange value remains despite everything important.
The risk of a speculative bitcoin, and not an operational one…
How could bitcoin (BTC) be useful to exchanges if purchased through an ETF?
This is the question and the paradox behind the desire to create a bitcoin ETF. Indeed, bitcoin wants to be outside the financial system (at least in principle). It is therefore a priori absurd to buy a bitcoin via an ETF. Furthermore, if the bitcoin is purchased by the financial product vehicle, then it no longer has any effective use. This is the risk of having a bitcoin devoid of original meaning.
Therefore, BlackRock’s desire to democratize bitcoin is not consistent with bitcoin’s purpose. Moreover, recent claims to “replace” gold with bitcoin are also unrealistic. Bitcoin is undeniably distinct from gold, and neither history nor statistics bring them together.
In contrast, the statement that the ” bitcoin is an international asset is justified. Nearly 500 million people used cryptocurrencies in 2022. In fact, cryptocurrencies are distributed in most countries around the world. This is also one of the explanations for the success of bitcoin… It is an international asset, a means of exchange without political or national labels! The boss of BlackRock nevertheless seems more concerned with the democratization of bitcoin than with its adoption. The nuance lies in the use made of bitcoin. A non-operational bitcoin would be the death of bitcoin.
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