Bitcoin exceeded the price of gold on Mt. Gox this morning, an event which bitcoin advocates say is symbolic for the virtual currency.
The price has since dipped, and at the time of writing, is trading at $1,146 on Gox, below the gold spot price of $1,246 per ounce in US dollars.
The price of the coin, which broke $1,000 just days ago, has been rapidly approaching the price of gold, which has fallen in recent weeks. Today it reached a high of $1,242 on Mt Gox, topping gold’s $1,241.98 at the time.
Erik Voorhees, an early entrepreneur in bitcoin, was in jubilant spirits. Voorhees, who sold his gambling site SatoshiDice for 126,315 BTC this year, said that it was a psychologically significant event.
“For believers, it means bitcoin is really becoming a ‘respectable asset’. Clearly, bitcoin is no longer a penny stock. It’s playing in the big leagues – a share being worth more than a share of Google or Apple, and even more then an ounce of gold,” he said.
“Many of us two or three years ago said that bitcoin could (and probably should) absolutely cost more than an ounce of gold. We were laughed at and ridiculed. Now we can just look and say, ‘scoreboard!’”
This isn’t bitcoin’s first symbolic price threshold after all, points out Anthony Di Orio, the head of Canada’s Bitcoin Alliance, a national organization that promotes bitcoin. “It went past $500 and then $1,000, and now it’s past gold,” he said. And the value of the virtual currency surpassed silver long ago.
Falling gold prices
Bitcoin may have been rising to meet the price of gold, the precious metal has also fallen to meet it. The price of gold has taken a dive this year. At the start of the year, it sat at around $1,700, before plummeting to a yearly low in July. It rallied to just over $1,400 in September, but since then has fallen to a four-month low.
Gold’s most recent fall saw it drop $10 in around 10 seconds on 20th November. This drop accompanied news that the UK’s Financial Conduct Authority (FCA) have begun an investigation into pricing methods for gold on the spot market (the market where people trade directly between each other).
Traditionally, gold spot prices are set during a London-based conference call between five banks. Prices from those discussions are used to set spot prices for gold worldwide.
In addition to the FCA investigation, the German regulator, BaFin, is also said to be exploring the issue.
Other issues affecting the price of gold in recent months include fears over a potential early end to US stimulus measures, as stronger economic data emerges. When the US central bank buys bonds, it tends to boost gold prices, because people buy it to hedge against possible inflation.
Could bitcoin be gold 2.0? That’s unlikely, says Voorhees. It has several advantages over the precious metal, to be sure. It is instantly transportable anywhere in the world, making it suitable for Internet payments. It is also far easier to divide and recombine than gold.
”Put simply, it’s impractical for normal economic exchange. While it’s true that a digital gold could exist, such as e-gold, we know how that turned out,” said Voorhees.
On the other hand, gold continues to work even when the Internet doesn’t, and it is a long-standing, stable, and well-understood commodity. It is immune to bugs, hackers, or the loss of support from the community. “This is very special, and cannot be replaced by bitcoin for a very long time,” Voorhees said.
Whereas we know how many bitcoins we can mine, we only have a rough idea of how much gold is left to pull out of the ground, and how difficult it is to get. According to the World Gold Council, we have mined 174,100 tonnes of the stuff since civilization began, which would fit into a 21 metre cube.
Much of that is, of course, locked up in jewellery and industrial applications (and a considerable number of teeth). Actual world gold reserves total 31,575.1 tonnes. The US is the largest single holder of gold reserves.
Bitcoin’s market capitalization today is around $13.5bn. The total value of all gold mined in the world, at today’s price, is around $7.6 trillion. The total value of the world’s current reserve holdings is around $1.38 trillion.
Di Orio says that he lost 20% on his own gold investments last year. “I took my loss and put it into bitcoin and got my return back,” he said. “I no longer have gold holdings. I believe much more in the fundamentals of bitcoin.”
Gold is superior for conservative, steady, long-term storage of wealth, Voorhees suggested, while bitcoin is far better for commerce and payments. Voorhees advises people to keep their savings mostly in gold, and their spending money mostly in bitcoin.
“As bitcoin’s price crosses that of gold, it shouldn’t be taken as an indication that ‘bitcoin is better,’” Voorhees concluded. “They’re just different, and a proper understanding of the monetary virtues of both gold and bitcoin puts one ahead of just about everyone else on earth.”
Not everyone agrees, though. Venture capitalist Chamath Palihapitiya, who heads up the Social + Capital Partnership, has gone on the record talking up bitcoin’s potential for stored value. “What you’re talking about right now is, for the next three to five years, an unbelievably better stored value. It is gold 2.0. Right?” he said in April, arguing that bitcoin can be used to store long-term value outside of government control.
“Well, guess what? I can do the same thing with Bitcoin only I can do it outside the purview of every single government,” said Palihapitiya in the Forbes article. “It’s being used everywhere you would think it would be used. Russia, Iran, Iraq, Egypt, Venezuela, Argenina. Everywhere you have currency pressure. Everywhere you want to basically shield your assets. And then, after that, it will probably become a payment mechanism.”
In this Bloomberg article, Palihapitiya says that he has transferred 1% of all his assets to bitcoin as ‘schmuck insurance’, lest catastrophe in the financial markets cause problems for the precious metal. He also calculates how much a bitcoin would be worth if all bitcoins were to have the same capitalisation as all the mined gold in existence. He divides his estimate – $8 trillion – by the theoretical number of bitcoins – 21 million – and comes up with a theoretical upper bound of $400,000 per bitcoin.
This symbolic crossing for bitcoin may not mean that it’s better than gold, but it will likely bode well for the currency. Di Orio says that the news will make yet more people aware of bitcoin. This combined with a backlog of verifications in some exchanges (he cites Canada’s Virtex as having a three-week backlog), suggests that prices will continue to rise, at least for a while, as more people begin trading bitcoin, and the market continues to thicken.
“We will see more people going after this scarce supply, and the price will jump up,” he says. And unlike gold, we have a precise picture of how many new bitcoins will become available over time.
Gold image via Shutterstock