In fact, not only ethereum, other newer smart contract chains will also outgrow bitcoin in market cap overtime.
This will be obvious to you if you compare the return history of stocks v.s. gold👇
The chart below compares the long-run investment returns* per annum of US stocks vs gold for the past 200 years. Note this is “real returns”, i.e. effect of inflation taken out.
(* Data from Deutsche Bank, 2020)
Two things stand out:
1. time is the friend of stocks, the enemy of gold.
The return of US stocks is stable for different holding periods. Whether you hold for 15 yrs or 200 yrs, the average return is about the same, at around 6.5% a year. This reflects the stability of US economic growth over time.
The same cannot be said for gold. The longer you hold, the more you lose. A portfolio of gold returns less than 2% a year if your horizon is 75 years and beyond.
Is there any wonder that while the global gold market cap is $11 trillion, public stock market cap for US alone is $45 trillion? That’s simply the result of persistent growth differential compounding over time.
2. Gold is more volatile than stocks.
Not only is the average return lower for gold, it’s also more volatile. The chart below breaks down asset returns by decade. If your holding period is 10 years, you can expect to be in the red half the time if you invest your money in gold.
If you are a long-term investor, gold is clearly an inferior asset— lower return, higher volatility.
The reason for this is simple.
A store-of-value asset like gold doesn’t generate much new economic value itself. Its value is driven by fear psychology.
The industrial and commercial use cases of gold are few. Mostly people want gold b/c they think it’s an insurance against armageddon.
That’s why gold price goes up when inflation fear is high, and / or society is unstable.
Sidenote: The truth is ANY asset whose supply is limited serves as a hedge against inflation, e.g. stocks, real estate, Van Gogh paintings. They are just as effective a store of value as gold (or #bitcoin. Come to that in a sec).
The more afraid people are about the future, the more they like gold. So for gold’s value to consistently go up in the long run, you’re betting on people getting more and more afraid over time.
That’s also the reason why gold price is more volatile than stocks.
For stocks, you can use data on earnings and future growth projections to back out some sort of “intrinsic value” using valuation models like discounted cash flow.
If price drops too far below what those models suggest, value investors swoop in to pick up bargains. That in effect curbs the downside volatility of stocks.
The valuation of gold, however, relies almost entirely on sentiments. Sentiments are fickle and change fast. There’s no effective price floor for gold.
You hear crypto people say, “#bitcoin will go to $X trillions because gold is valued at $10 trillions and bitcoin is a better gold.”
In other words, they use gold as a benchmark to value bitcoin. But few asks what benchmark is gold valued by. The truth is such benchmarks do not exist.
The comparison btw gold and stocks gives an apt analogy to a comparison btw #bitcoin and other blockchain platforms like ethereum.
The former is gold 2.0. The latter are networks where applications of vastly different use cases get built on to create new economic values. i.e. they are more like stocks.
Unless you believe the world is going to hell and people will be increasingly afraid, the latter is going to outgrow the former big time.
Now you may say, DApps can be built on bitcoin blockchain as well. Yes they can. But it doesn’t mean they will be.
Ethereum and other chains are already attracting most dev resources and DApp users. Why would people forego these existing networks and adopt the bitcoin chain?
Don’t tell me because bitcoin is most decentralized and secure. Those are killer features of a store of value, but by no means the most essential features for a smart contract platform.
For the latter, speed, cost, ease of use, and size of ecosystem win the day. The rest are all nice-to-haves.
Relatedly, I sold all my bitcoins a while ago. You can read about it here.