This photo is very important in understanding why I believe Bitcoin will replace gold as a store of value over the next several decades.
First, if you would like a more general introduction to Bitcoin then click here as this post will talk more on the matter of supply for both assets.
What is a stock to flow ratio and why is it important? The stock-to-flow ratio of a commodity is the amount of the asset that is held in reserves divided by the amount produced every year.
The higher the stock-to-flow ratio the reduced inflation occurs on the asset annually. Commodities with a higher stock-to-flow ratio are preferred for their scarcity.
The combined gold market is estimated to be worth $7.8 Trillion with surprisingly only 10-15% of that value coming from jewellery, electronics, dental and industries that make practical use of gold.
The rest of that value accrues from a long history of speculation built on the principle that gold is a scarce and valuable asset with strong demand. Gold is seen as the most respected commodity for its high stock-flow-ratio which has to lead it to become a global reserve currency held mostly by large corporations, nation states and banks.
Today, Bitcoin has a considerable lower stock-to-flow ratio than gold and this is where the opportunity presents itself. Bitcoin’s software has a core component cooked into the protocol in the form of an event called “the halvening”
‘The halvening’ is an event that happens every 210,000 blocks or roughly every 4 years where the block reward given to the miners for securing the network gets halved. For example in 2009 the block reward was 50 BTC and today (Jan, 2019) it currently sits at 12.5 BTC with the ETA for next halvening happening on Mon, 25 May 2020 01:35:11 GMT which will take reward down to 6.25 BTC.
The idea that Bitcoin is the first ever truly verifiable, non-confiscatable fixed asset to exist is an extremely powerful concept. Without its strong and non-inflatable monetary policy Bitcoin would have a futile attempt of being able to disrupt gold and even accrue value in the first place.
Over the next several decades we will see Bitcoin’s stock-to-flow ratio increase significantly and with the incredible influx of talent coming into the industry to build out the infrastructure (custodial, ETF’s, futures) needed to allow legacy financial institutions to dip their toes in the soon smooth and regulated crypto asset water. The next few years will be very interesting.
There will only ever be 21,000,000 Bitcoins with the current supply sitting at 17,478,525 BTC with a USD price of $3,600.