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Bitcoin and gold both hit record highs this week, and that got me thinking about JPMorgan’s “fair value” model. The framework essentially benchmarked the world’s biggest crypto against the most trusted precious metal as a way of checking its price. The approach – which the bank first floated back in 2022 – is far from perfect, but it’s a useful way to think about the price of a single Satoshi and how that stacks up against the market’s shiniest old-school asset.
First, the investment bank calculated a long-term theoretical price target for bitcoin by assuming that its total market value is equal to that of all the gold that’s held privately for investment purposes. That assumption was based on the growing argument that bitcoin is “digital gold” – i.e. a store of value in the digital age. After all, the crypto shares many similar characteristics with the shiny metal: it’s in limited supply, it’s durable, it’s fungible, it can be divided into smaller “nuggets” (i.e. Satoshis), and so on.
According to the World Gold Council, there are 216,265 metric tons of mined gold in the world with a total market value of almost $28 trillion. But it wouldn’t exactly be fair to equate bitcoin’s total market value with this figure: almost half of that gold is used as jewelry, and another 17% is held in central bank reserves. Bitcoin, you might be disappointed to hear, can’t be used as jewelry, and we may not see major central banks holding cryptocurrencies as part of their reserves anytime soon (but never say never).
That’s why the figure JPMorgan is focused on is the amount of gold held privately for investment purposes – that is, gold held as a store of value by individuals and investors (both retail and institutional). The figure includes all the bars held by gold ETFs, too, since private individuals and other investors ultimately own them.
According to the World Gold Council, there are 48,634 tons of gold held privately for investment purposes. This is what they refer to as “bars and coins (including gold-backed ETFs)” on this data page (note that it was previously called “private investment”).
One ton is equal to 32,150.7 troy ounces, which – at this week’s record-high price of around $4,000 a troy ounce – brings the total value of gold held privately to $6.3 trillion. And if we divide this by the total number of bitcoins in circulation (19,931,743 at latest count), we get a theoretical price target of around $313,800 per coin.
Now here’s where things get interesting. The assumption JPMorgan makes is that investors wouldn’t allocate an equal amount of bitcoin in their portfolios for store-of-value purposes as they would gold because, let’s face it, bitcoin is a lot more volatile – and therefore a lot riskier – than the metal.
If, hypothetically, bitcoin’s volatility were the same as gold’s, then JPMorgan’s framework would assume that the crypto’s fair value is the $313,800 per coin we calculated earlier. But in reality, bitcoin swings around a lot more, so the bank instead divides this number by the bitcoin-to-gold volatility ratio. That means the higher bitcoin’s relative volatility is, the lower its estimated fair value. (Note that volatility in this framework refers to the annualized standard deviation of bitcoin’s/gold’s movements over the past 180 trading days).
When JPMorgan first did this analysis in 2022, the ratio was at 5x, and the bank anticipated it would decrease to 4x in the future and remain roughly stable at that level. So, sure, adjusting bitcoin’s theoretical price by 4x would value the coin at $313,800/4 = $78,500.
However, the situation has since evolved: over the past few years, the bitcoin-to-gold volatility ratio has steadily decreased, as the crypto’s swings have become milder over time. The ratio currently stands at around 1.53x, which would value bitcoin at $313,800/1.53 = $205,100 – well above even its new all-time high of around $126,000.
While the investment bank’s framework is a good starting point, there are two key things it doesn’t factor in.
If you own some gold bars or an ETF tracking the shiny metal, then you probably already know that there’s not much you can do with your gold. In contrast, there’s a load of stuff you can do with bitcoin. First, you can use it as a form of payment. According to Crypto.com, more than 15,000 merchants worldwide currently accept bitcoin directly or indirectly, including brands like Subway, Starbucks, BMW, and Microsoft. Second, you can easily and cheaply send bitcoin to another person on the other side of the globe without a middleman or any risk of censorship, making it an efficient method of money transfer.
Third, you can deposit your bitcoin at centralized or decentralized lending platforms to earn interest (though this strategy does come with its fair share of risks). Gold not only generates zero yield, but it also incurs storage costs in the form of custody and insurance fees if you hold it physically. And finally, you can use your bitcoin as collateral on certain lending platforms to borrow other cryptocurrencies – including stablecoins, whose values are pegged to fiat currencies like the US dollar. One fintech firm even allows you to use your bitcoin as collateral to take out a mortgage.
These are just some examples of bitcoin’s use cases, with more being created all the time. The point is that bitcoin is more useful than gold, and that utility is worth something. Worth a lot, actually: PayPal – which offers electronic payments – is valued at $71 billion, while Wise and Western Union – big players in the money transfer industry – are valued at $14 billion and $3 billion, respectively. JPMorgan’s framework completely ignores this additional value.
Consider this: after last year’s “halving” event, 3.125 new bitcoins are mined every ten minutes, the equivalent of 164,250 new coins every year. That represents just a 0.8% annual expansion to bitcoin’s supply base, which is less than half the 1.7% rate at which gold’s supply is increasing (with roughly 3,650 tons being mined every year).
What’s more, there are an estimated 54,770 tons of proven gold reserves in the ground. That means gold’s supply is set to eventually increase by 25% – or more if new gold reserves are discovered. Meanwhile, there’s a hard limit of 21 million bitcoins, which means bitcoin’s supply can increase by roughly 5% from here, but no higher. Some people even argue that bitcoin’s true supply will fall shy of that 21 million, as users forget their digital wallet keys, accidentally send crypto to dead-end addresses, and so on.
In other words, with new bitcoins being generated at half the rate of gold, and with its total supply projected to rise by only 5% (compared to the metal’s 25%), the math skews in the OG crypto’s favor. And bitcoin’s naturally constrained supply should, at least in theory, boost its value over gold by making it a rarer asset.
