BNY Melon compare gold and bitcoin valuation methods
New York (Mar 29) BNY Melon has put together a comprehensive report to discuss the difference between the two and how they can be viewed in this current climate. The report focuses on how you could value each asset using different metrics. One of the first statements highlights Bitcoin's classification as a currency. BNY noted, "The most commonly accepted definition of a currency is a store of value and a medium of exchange. By these accounts, Bitcoin fits the description of a nascent currency".
They kicked off the report with this statement: Bitcoin is also frequently compared to gold. Indeed, there are many similarities and gold is a worthy role model for Bitcoin. After all, gold has been accepted as a store of value and medium of exchange for centuries (nowadays, mostly as a store of value, almost none is used as medium of exchange). We believe gold is also the only globally accepted “currency” that has circumvented the issue of sanctioning entity. Supply is also fairly limited. According to the US Geological Survey, gold mine production grew at a compound annual growth rate (CAGR) of around 1.6% from 1970 to 2017. Using 2020 as a starting point to a theoretical end date of 2033 when 21 billion Bitcoin will have been mined, Bitcoin production is expected to grow at a CAGR of about 1%. Theoretically, everyone is free to mine both gold and bitcoin and neither supply is monopolized by governments. Other similarities include no biological or time decay.
The report focuses on valuation models including the stock-to-flow ratio (S2F) and the stock-to-flow cross-asset model (S2FX). At the end of the report the bank says "valuation is more art than science. Case in point, the largest financial market is the global currency market. Currencies have been utilized in one form or another for centuries. Yet to this day, there are still several competing models for currency valuation.".
"The implication from this model is that as Bitcoin gains more mainstream momentum and is viewed more like gold, the scarcity value (as measured by S2F) and the subsequent halving will ultimately drive prices to the gold dot cluster and implied total market value". The report then notes valuation is “more art than science” and therefore emphasizes that all models have to reach Bitcoin’s “fair” price will be a “constantly” evolving work.
This suggests the finite supply of both assets is at the forefront of the investment case in both assets. This means the supply vs demand curve is a key focal point in the trajectory of the price of both of these assets. Adding to this, gold is very popular as an asset because it does not burn. Money, computers, etc can be damaged and although gold can be damaged it is far more resilient than both paper and computer storage devices.
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