When considering the primary value propositions of Bitcoin, it is becoming increasingly common to compare gold’s monetary principles as a store of value to that of Bitcoin. Bitcoin, much like gold, is currently a market leader in its space, by a significant margin. For example, gold has a nearly 9 factor lead in market cap compared to that of silver…we can see a similar comparison between that of Bitcoin and ethereum (the top leaders in cryptocurrency by marketcap) where Bitcoin has a 4 factor lead in market cap compared to that of Ethereum.
This raises an important point to consider. Why is Gold the dominant precious metal compared to that of all other precious metals? The answer is quite simple, gold is the hardest to produce, remains relatively inelastic to fluctuations in supply and demand, and therefore, functions exceptionally, compared to that of all other precious metals, as a store of value. Other metals, are valued particularly by their industrial use case, utility, and speculation to a certain degree. But, largely, gold remains the market cap leader due to its superiority as a store of value over other metals.
It is easy to see the comparison here between the market cap leader in cryptocurrency and the market cap leader in precious metals. While the comparison isn’t necessarily one to one in it’s complexity, to the cryptocurrency newcomer, it could potentially look like Bitcoin is set to be outpaced by another, newer cryptocurrency by sheer utility alone. However, what this doesn’t take into account is the monetary protocol upon which Bitcoin is founded which has already established it as the most superior store of value in the cryptocurrency market.
Thus, should other tokens emerge which offer various forms of utility that may provide some value to the digital economy, their ability to function better than Bitcoin as a store of value is null. The phenomenon of Bitcoin’s creation, it’s lack of a central hierarchy/figure, its decentralized architecture, and its first mover advantage/brand identity simply gave it a head start over all other cryptocurrencies. When these factors are considered with its theoretically perfect hard, sound money monetary protocol, it cannot be beaten. For the first time digital scarcity can exist, thanks to the remarkable double spend conundrum finally being solved.
But the comparisons to the cryptocurrency market and precious metals doesn’t end there. Consider that during a bull market, silver (and in many cases other precious metals) rise more than gold…however during a bear market, silver falls much farther and faster than gold. This phenomenon is nearly identical to what has been observed in the cryptocurrency space during the previous bull and bear market cycles.
However, what we have yet to see on a long timeline, is the deflationary effects of Bitcoin’s monetary protocol and the effects it will render upon the market demand for Bitcoin. Gold, regardless of how hard it is as a store of value or how inelastic it is to fluctuation in supply and demand, is still, technically inflationary. Bitcoin, will one day be a deflationary asset, and while we are still a few halvings away from Bitcoin being less inflationary than even the USD…on a long enough timeline, Bitcoin will become a deflationary asset. In fact, it could be argued that Bitcoin will be the most scarce asset ever, because of its artificially induced scarcity. This means that regardless of the utility offered or discovered by extraneous cryptocurrencies (similar to that of precious metals) it is almost entirely impossible to expect Bitcoin to lose its market dominance as the primary cryptocurrency store of value. It is also important not to forget the value of Bitcoin’s transnational network in terms of the Lindy effects and Network effect.
Much like that of precious metals, altcoins have the potential to outperform the market leader (gold) in the next bull market…but with that increased volatility also comes the potential to far under-perform the market leader in the next bear market, as has already been witnessed by the -90% retracements seen in the cryptocurrency market in 2018. Unlike precious metals, however, crypto is an entirely newly emerging asset class and the volatility cannot be expected to go away, particularly due to the lack of perceived intrinsic value of the underlying asset compared to that of a physical metal used in an established industrial process…many of the applications built around proprietary cryptocurrencies have yet to be established.