Why is price of bitcoin less than gold if it is worth more?
First, what makes it worth more than gold is that there is no investment reason to choose gold over bitcoin even when their values will match. But to answer the question, it takes time for prices to adjust. Many people have ended up with 90% of their wealth in bitcoin, and even if they understand that its worth much more than its current price, some diversification, debt paydown, and life changing spending all contribute to supply meeting the adoption demand. More importantly, bitcoin supply is currently growing by 4% (gold is only 2%), and miners need to take some profit to pay for electricity and equipment.
Also, the complaint that many people are rushing into bitcoin for fear of missing out, actually serves to reduce the volatility of the price, and slow down its price rise. Most in this group who do not understand bitcoin are happy to get 20% return in a week, and then wait/hope that the price comes back down.
The fear spreading by financial industry deadenders that bitcoin price has risen too quickly can be motivated by hope of buying at a lower price, but its false on several counts. First, when looking at a parabolic chart it is not appropriate to compare it to stocks (or NASDAQ tech indexes in late 90s), but instead to technology adoption curves.
Not listed on this chart is the deregulation of stock brokerages in the 1980s that allowed self-directed brokerages and lowered trading costs by 90% and increased trading volume by 2500% (just by 2004). This democratized stock investment to attract people with much smaller wealth levels. More wrongly than rightly, this allowed exhuberance in penny stocks with players having a few thousand dollars hoping to reach life changing goals with it. Bitcoin as an investment has the powerful advantage of having large and small investors in the same asset, as opposed to segregating worst scams for small investors than lesser scams for large. Most ICOs and many alternate cryptocurrencies are unfinished projects that include a portion of coins for management and marketing, and so not only lack the fairness of bitcoin, but the financial industry's mantra of "blockchain not bitcoin" is one of forming the same bribery promotion agreements for other projects. The ICO markets are more prone to overhype and fraud than is bitcoin, and may lure in the smaller less sophisticated investor.
A little known key adoption metric is that daily crytocurrency trading volume has surpassed that of the NYSE. Crypto trading is also for 7 days/week not just 5.
The intrinsic investment value of gold and bitcoin
At their core, both have value because they are expensive to mine. Gold keeps its value (after inflation) because the mining expense mostly goes up with energy and labour inflation. Bitcoin's mining expense goes up every 2 weeks (20% over last block period), and every 4 years, doubles in cost with a halvening-reward event. Bitcoin will have a natural tendency to keep increasing in price due to the human nature of trading: Miners being predisposed to accept only prices higher than their cost (and even if out of desperation they'd violate the rule, they would stop producing), and buyers accepting that a reasonable and fair offer should consider those costs. Once you are willing to accept that a mathematically formulated number is worth more than a penny or a dollar, there's no longer that argument that it should be worth less than a trillion. You can't wear either price's "object" around your neck.
Other reasons that gold price upside is limited is that as price increases, more supply expanding mining ventures are made, and people with jewelry "cash it in" to also contribute to supply increases. Even central banks can be net sellers of gold (2016 world bank reserves were 5500 tons below 1965 levels). They don't yet have bitcoin to sell... only to buy.
The historical case for 10% of wealth in gold
Gold as part of a portfolio offers diversification benefits to stocks and bonds in that the latter's value are highly dependent on strong banks that do not require to withdraw from their client-frontrunned positions to bail out the relatively frequent failures of one of their other scams. Weak banks can't keep funneling money too prop up the two main financial markets, and they tend to be net sellers of gold (to clients) as they usually seek holdings opportunities for earning interest or fees.
Similar to financial panics, gold is insurance against government failures/panics related or not to financial system failures. This broadly affects banks, housing, and business throughout a nation, and gold at least goes down much less than the other asset categories, and if the problem occurs in a relatively unimportant far away land, gold will usually go up as it is demanded by those affected.
Gold is insurance against war and uninsurable housing destruction. War is usually a much worse form of panic than simple government financial collapse. Gold tends to go up in value due to demand for it being the only form of wealth in the area affected.
Gold is insurance against official asset seizure/freeze. You might be able to escape bankruptcy or governments without there being an official trace of holdings.
The 10% of portfolio in gold advice is admittedly much higher than the 0.6% of global wealth in private investment gold sector. It is also advice that is based/suitable for people highly concerned with preserving wealth as opposed to reaching for expected returns under the best case optimistic future scenarios. The rationality line that separates these 2 groups is whether they consider themselves already rich. For the latter group, lottery tickets are better investment choices than gold which is appropriate for reducing wealth variance over the broadest range of scenarios.
Bitcoin is a better investment than gold because
- It will go up in value in nearly all eventualities, including the eventualities that would propel gold's value. Any eventuality that is good for gold is even better for bitcoin. The new supply rate for bitcoin will drop to 2% 1% 0.5% 0.25% on years 2020 2024 2028 2032.
- There is an estimated 4M bitcoins that has been lost foreever. Gold is always recyclable (cost permitting, but technology can always open options) or findable again when it is lost. The above supply growth rates do not take account of bitcoins lost due to death or innadequate backup procedures. Global available supply may thus decrease within 6 years, even as adoption demand continues to increase.
- Technological improvements in bitcoin that permit widespread currency/transactibility applications and enhancements are likely. Not possible for gold.
- Currency use is unimportant for value as long as you can "annuitize" your holdings. Converting a small amount to fiat monthly to cover needs. This is much easier with bitcoin than gold, and carries less fees/slippage and time costs. Holding an asset that goes up significantly may not even decrease its remaining balance month to month. Debit card products for some cryptos are also effective at "conversion on spend" transactions.
- Security/storage is cheaper and more effective, though it does require understanding good/best practices. Its also more portable. 100 pounds of gold is worth under $2M. You can have an unlimited amount of bitcoin on your phone.
- Both gold and bitcoin are better holdings than fiat, when fiat has negative nominal or real interest effects to holding them. There is a good case for bitcoin being a better holding than long term government bonds. The lower the interest rate, the better the case. But also, where a high interest rate indicates default risk, that too is a good case.
- The advantages to personal investment are the same as reasons central banks should have bitcoin in reserve. The most important being #1 (they will go up). In the event of war or catastrophe, a state can pay soldiers or other payroll/social support in bitcoin. Gold can be a liability for war, and historically has served as motivation for invasions. Iraq had 6 tonnes of gold reserves in 2003. Bitcoin is more flexible and with more long term value than holding individual nations' fiat as reserves.
- Gold has been banned by governments including laws against hoarding in the US. Transporting cash or gold even within the US is subject to confiscation, but even more opportunities exist to do so at the border. The transportability feature of bitcoin is especially useful for oligarchs and heads of state that may be vulnerable to revolution or international persecution/war.
- Every other reason than #1, increases the expected value appreciation of bitcoin relative to gold, and so strengthens reason #1 which is the only necessary reason to choose bitcoin over gold.
- Bitcoin was fairly distributed, with the very first miner(s) either losing, abandoning their coins, or potentially waiting to apply them to a large scale philanthropic goal. There is legitimacy attached to being first as compared to what are mostly copies of it. Alternate coins have had either pre-mines and/or pre-sales (with proceeds going to preminers) that provide insider benefits. ETH has an undefined supply limit, and is focusing on utility rather than value.
- Bitcoin has the most studied and most certain cryptographic/economic soundness compared to newer claims of smaller projects.
- Bitcoin has a decentralized governance process. Coins with premines or backed by large holders have centralized governance. Governance decisions will benefit the governors. With centralized development controlled by the governors, for instance, a decision to expand the supply beyond the publicized limit in order to further incentivize development (possibly due to missed timelines) is a power that centralized developers could inflict on their community as leverage over the communitiy's dependence on them. There is never a reason to buy a coin based on the reputation of its team/investors. That reputation is currency to fuel scam.
- Bitcoin has the highest mining costs and fees. This is the single most important factor in protecting the value (preventing cheating) of the chain. This makes the chain safer for receiving large transactions. Low/no mining fee coins may lack incentives to sustain the chain under low activity or when its size increases greatly.
- The highest valuation and trade volume makes it most suitable for the largest transactions, and wealthy players participating in the investment value. Circularly, bitcoin should make up the largest portion of the largest portfolios for its liquidity benefit.
- The suitability of bitcoin as the trading counterpart to other crypto (because its the largest and most liquid) makes bitcoin a safety destination when there is market turmoil, and so the safest crypto currency. If any alt-coins or ICOs are scams, then their temporary value is a spring waiting to be dumped into bitcoin.
- The high and rapidly growing cost of creating bitcoin means it has clear intrinsic value independent of its ease of transactibility or adoption. Though the network effects of having heard of it, knowing how to receive it, or being able to send it do increase its utility and value.
- The forks of bitcoin (copies that act as a dividend to bitcoin holders) create scaling capacity indirectly (and low fee transactable units) and provide bonus advantages to holding bitcoin.
- If a competing crypto currency is successful because of a well implemented feature, then a new fork of bitcoin that copies that feature will reward bitcoin holders who bother to collect the new fork's value. Bitcoin's widest adoption level would permit the fork to leverage the desirable feature more thoroughly than its innovator. The ecosystem of transactibility services for bitcoin has a naturally easier time including support for one of its forks than a different coin.
- Continued adoption as an investment consideration, and money inflows.
- Technology that lowers fees per transaction, eases decentralized trade, creates instant settlement channels, and sidechains with new features.
- Crypto debit cards and web payment cart options being more widespread. Rents and taxes payable through web interfaces with banking independent options.
- Other applications of technology or adoption improvements include exchanges acting as a low fee banking/settlement network that provides an off chain (or lighting network) visa+ scale commerce platform.
- ETFs on major stock markets that hold/buy bitcoin.
- China (and minor countries) unbanning cryptos again.
- Central bank reserves and corporate long term asset holdings.
- Banking system integration and custody/payment services.
- Recognition that bitcoin is a more suitable investment than bonds or stocks up to 50% of a portfolio.
- Even after all of the above adoption points/levels mature and level off, price will continue to increase above and beyond fiat inflation as part of the 4 year new supply halvings, and associated increased mining costs.