Oct 09, 2019 10:53 AM | Kyle Torpey


The Bitcoin Dominance Index (BDI) is one of the most popular and talked-about data points in the crypto asset market. But there are many problems with this measurement of Bitcoin's role as the gold standard of cryptocurrencies. Most of the issues associated with the BDI have to due with its reliance on the problematic market cap metric, as there are plenty of different ways in which this statistic can be gamed.

As I covered in a previous article, a combination of different data points is likely to provide a much more accurate depiction of Bitcoin's role in the greater cryptocurrency ecosystem. Of course, such a model for comparing cryptocurrencies is not available — at least not to the general public. Perhaps there simply isn't enough demand for a worthwhile system of tracking the various competing cryptocurrencies because Bitcoin is known to be the king without much real competition.

With all of this in mind, it may be wise to ignore the BDI completely and replace it with something more practical, such as a comparison of the Bitcoin and gold markets. Bitcoin's utility as an apolitical, uncontrolled form of digital money is still the main, proven use case of this technology, which is why it was given the "digital gold" nickname.

In this way, gold is Bitcoin's real competition, so it makes sense to track the digital asset's dominance (or lack thereof) against gold rather than altcoins, which have mostly turned out to be little more than noise (and perhaps simply a bubble that is still deflating).

What Does "Digital Gold" Actually Mean?

The digital gold meme around Bitcoin gets thrown around a lot, but what does this comparison to the former basis of the global financial system actually mean for the peer-to-peer digital cash system?

Gold was originally preferred as money because the market found that it had better monetary properties than any of the other commodities that existed in the world. It became the trusted ledger for tracking debts due to its relatively stable value over the short term, ability to act as a store of value over the long term, and ease of use as a medium of exchange.

There are centralizing factors at play with gold, however. The precious metal was eventually held by banks rather than individuals, and paper IOUs were issued based on the gold holdings at the bank. This is what led to the monetary systems of today, where the US dollar and other paper fiat currencies float based on trust in central bankers' ability to regulate the money supply rather than gold reserves.

Much like gold, the hope is that Bitcoin can act as a trustworthy store of value over the long term due to its incorruptible monetary policy. However, the crypto asset also comes with a much better system for transferring ownership anywhere in the world in a matter of minutes. Additionally, the ability to store Bitcoin in one's head as nothing more than a passphrase can be seen as an improvement in terms of security from theft or government-approved seizure.

Well-known cypherpunk Nick Szabo has even argued that governments would be better off holding Bitcoin rather than gold in their reserves for security reasons.

In a way, Bitcoin has illustrated the limitations of gold in terms of its utility as a permissionless money in a digital age. Due to the level of centralization caused by gold's existence in the real world, there are limitations to the level of financial self-sovereignty that is possible with the precious metal in an increasingly digital age.

As Castle Island Ventures Partner Nic Carter recently explained, the altcoins generally miss this key point of why Bitcoin exists and has value in the first place. These Bitcoin alternatives are generally focused on making technical tweaks rather than the development of a better form of money, with Ethereum as a possible exception via Ether's potential pivot away from the "digital oil" analogy.

Is Bitcoin Ready to Compete with Gold?

While the hope for Bitcoin is that it will eventually compete favorably with gold on the open market, the reality is that gold dwarfs the entire cryptocurrency market today. Bitcoin is often referred to as a safe haven asset, but gold is still the king of that use case, and it's unclear how the Bitcoin price would react to a recession.

Gold still has thousands of years on Bitcoin in the credibility department.

According to data from World Gold Council and XE, the entire above-ground gold market is estimated to be around $10.2 trillion. According to Messari, the Bitcoin market is $147.5 billion in size. This means gold's dominance over the two combined markets is 98.47%. Put another way, the real Bitcoin Dominance Index (measured against gold and not altcoins) is at just 1.43%.

That said, Bitcoin's value-add in the area of permissionless online money transfers should not be underestimated. It's likely that Bitcoin is already more commonly used in payments and transfers than gold. There isn't data available on this, and there are some ways you can now pay for things with gold, but I think even gold’s fiercest advocates would probably contend Bitcoin has a bigger presence in online payments. Google Search Trends certainly suggest that’s the case.

Of course, if the medium-of-exchange aspect of money was the most important, then the Bitcoin Cash price probably wouldn't be performing so poorly.

Gold is quite popular among libertarians because it isn’t tied to a particular nation’s economy (and it can be buried in the backyard). But politically-minded gold bugs face a philosophical problem: they're opting into a system where permission from government is needed for any online transaction, and there is no such thing as digital financial privacy due to the inherent centralization issues of gold-backed digital currencies.

It's possible that the world needs to become move closer to a truly cashless society before these advantages of Bitcoin become more apparent to libertarians and the general public.

Consider: people have become more conscious about how they use the internet in reaction to the Snowden revelations and various Facebook scandals. A recent survey from privacy-focused search engine DuckDuckGo found that more people are taking control of their personal data, which should be bullish for Bitcoin over the long term.

As a final note, it should be pointed out that Bitcoin's full potential goes beyond the gold market and into the greater store of value market more generally, which would include assets like silver, real estate, and fine art. This is something Blockchain Capital's Spencer Bogart talks about quite a bit.

The combination of Bitcoin's digital gold properties with the size of the entire store of value market is behind some of the most bullish Bitcoin price predictions for the next five to ten years, such as the $100,000 price predicted by Morgan Creek Digital Partner Anthony Pompliano for the end of 2021. But of course, for Bitcoin to hit those numbers, it needs to increase the kind of Bitcoin dominance that really matters: Bitcoin vs. gold, not Bitcoin vs. altcoins. Bitcoin has already started to chip away at gold’s role as a global, apolitical store of value, and that trend is likely to continue over the next five to ten years as all aspects of society become increasingly digitized.

This is an opinion piece and it represents only the opinions of its author.

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