Bitcoin was introduced to the world over a decade ago. Ever since its inception, bitcoin disrupting the financial system had received severe criticism, especially by banks. Surprisingly, a German bank recorded an extremely bullish sentiment, out of the blue, for the world’s first decentralized cryptocurrency, bitcoin. According to the BayernLB, bitcoin will surpass the price of gold with a massive margin. The Munich based bank predicts bitcoin price to increase exponentially before landing on the $90,000 mark in 2020.
Bitcoin, often regarded as digital gold, had been compared with several other assets in terms of growth and several other aspects. Manuel Andersch, senior FX analyst at BayernLB, also known as Bayerische Landesbank, after outlining the impact of bitcoin’s stock-to-flow ratio on bitcoin’s price commented:
If the May 2020 stock-to-flow ratio for Bitcoin is factored into the model, a vertiginous price of around USD 90,000 emerges. This would imply that the forthcoming halving effect has hardly been priced into the current Bitcoin price of approximately USD 8,000
In simple words, stock to flow ratio is a measure of the abundance of an asset where stock represents the stockpiles of the commodity and flow represents its new supply. Technically, stock to flow is the amount of a commodity held in inventories divided by the amount produced annually.
When stock to flow approach was applied to bitcoin by the bank, a strong correlation emerged, showing the market value of bitcoin and its stock to flow ratio. It was suggested that following bitcoin halving scheduled for 2020, bitcoin’s degree of hardness will be comparable with gold’s.
Furthermore, with bitcoin halving of 2024, while the degree of hardness of bitcoin is expected to increase more, gold is predicted to earn its stock to flow ratio. This means that unlike bitcoin, gold will be going through the hard way to acquire its stock to flow ratio.
Bitcoin and gold have several similarities. While the latter is a recognized store of value asset, many crypto enthusiasts believe that the former has also transformed into a store of value. Besides, both gold and bitcoin are mined. However, the processes of mining vary for both assets. Bitcoin is digitally mined through computers and software but gold is physically mined.
Apart from different mining procedures, both asset classes have entirely different behaviors. Bitcoin is considered to be an extremely volatile asset whereas gold isn’t known for abrupt price changes. In addition to that, as per the Chairman Federal Reserve Jerome Powell, bitcoin is an alternative to the gold.
Although the bank analyzed the future of gold and bitcoin while comparing them through the stock to flow ratios and found bitcoin’s future to be prospective, the bank cautioned investors to take great care while investing. As the price of bitcoin is dependant on the fundamentals of supply and demand, no one can predict the price with extreme precision. However, quite certain about the future of bitcoin, the bank remarked:
Only one thing is clear: if Bitcoin is indeed to become the money of the 21st century, it will be because its properties (above all its high degree of hardness) have been preferred to those of alternative types of money – after all, Bitcoin is a completely open monetary system operating on a purely voluntary basis.
Before the current financial system, the monetary system of the world constituted of gold only. As the present financial system compromising of banking institutes circulating fiat is flawed, bitcoin is often considered as a solution to today’s financial system. It is viewed as a replacement to the fiat losing value due to unstoppable inflation. Let’s see if bitcoin having a finite supply is able to tackle inflation while dominating over fiat currency.