Comparing the issuance of the USD with Gold and Bitcoin

In the world of finance and investment, the supply dynamics of a currency or commodity play a critical role in determining its value. This article explores and compares the issuance and supply mechanisms of the United States Dollar (USD), gold, and Bitcoin, examining how these factors impact their role as stores of value and mediums of exchange.

The United States Dollar (USD)

The USD, like most fiat currencies, features a flexible supply, controlled by monetary policy decisions from the Federal Reserve, the central banking system of the United States. The supply of USD is not fixed and can be adjusted to meet economic needs. During periods of economic downturn or financial crisis, the Federal Reserve can increase the money supply through mechanisms such as lowering interest rates or through quantitative easing (QE). QE involves the purchase of government securities or other securities from the market to increase the money supply and encourage lending and investment.

The issuance of new dollars relative to its existing supply has significant implications. For instance, increasing the money supply can lead to inflation if the growth in money outstrips economic growth. This has been a concern particularly in scenarios like the post-2008 financial crisis and the recent COVID-19 pandemic response, where large-scale QE was implemented.

Chart source: https://tradingeconomics.com/united-states/money-supply-m2

We can look at the M2 indicator to have an estimate of how the supply of USD has grown over the years. M2 is the U.S. Federal Reserve’s estimate of the total money supply, including all the cash people have on hand, plus all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs). Retirement account balances and time deposits above $100,000 are omitted from M2.

According to Investopedia Source the M2 money supply has grown from $4.7 trillion in 2000 to $20.8 trillion in March 2024. With notable jump from 15.3 to 18 trillion in 2020 during the pandemic. This translates into a growth of about 340% since 2000 and a compound annual growth rate (CAGR) of 7.41%

Gold

Gold differs from fiat currencies like the USD in that it is a tangible commodity with a supply that cannot be as easily altered. The supply of gold expands through mining output, which generally grows at about 1-2% per year. This relatively fixed rate of supply growth means that gold cannot be devalued through substantial increases in supply by any single entity or government. Its inherent scarcity is a key reason why gold is considered a long-standing store of value.

Unlike fiat money, gold’s status as a precious metal means its utility and value stem not only from its role as a currency but also from its uses in jewelry and industrial applications. However, the bulk of gold demand comes from investment and monetary uses, particularly as a hedge against inflation and currency devaluation.

Chart source: https://www.statista.com/statistics/238414/global-gold-production-since-2005/

If we look at the above ground stock of gold which is 212,582 Tons (Source). And put that against the existing supply in 2023, 3,000 metric tons (see above), we can estimate an annual growth of the supply of 1.4%.

Bitcoin

Often referred to as digital gold, it shares some characteristics with both gold and fiat currencies but also has unique attributes. The Bitcoin protocol caps its supply with a maximum limit of 21 million bitcoins. The protocol and the network consensus, also make it immune to manipulation or inflationary policies.

Bitcoins enter circulation through “mining,” a computationally intensive process where miners solve cryptographic puzzles to process transactions and earn new bitcoins. This method is designed to emulate the resource-intensive nature of gold mining. Unlike gold, Bitcoin features a predetermined issuance rate that diminishes over time through an event known as “halving.” During this event, the rewards for mining new blocks halve approximately every four years.

The predictable issuance model and finite supply of Bitcoin contrast sharply with the flexible issuance policies of fiat currencies. This design intends to offer an alternative to traditional fiat systems by providing a predictable and transparent supply that central authorities cannot be influence.

Let’s look at 2023, for example. The issuance in 2023 was about 328,125 Bitcoins ((210,000 * 6.25) / 4) for an existing supply of 19.6 million (out of the 21 million maximum). This represents a growth of 1.6%. However, after the April 2024 block reward halving, the yearly issuance will drop to 164,062 Bitcoins per year ((210,000 * 3.125) / 4), or 0.8%. This is the first time since its launch that the issuance of Bitcoin has fallen below that of gold. In four years, in 2028, it will drop to 0.4%. It will be further cut by 50% every four years until it reaches zero, with all Bitcoins being created by the year 2140.

Implications for Value and Stability

The differences in issuance and supply mechanisms among USD, gold, and Bitcoin lead to varying implications for their stability and use as stores of value. From the above calculations, we know that the supply of:

• The USD grows annually by about 7% and is accelerating to cope with the debt.
• Gold’s supply grows by a stable 1.4% and we can expect it to remains between 1 and 2%.
• Bitcoin, as of April 2024, grows by 0.8% and will decrease by 50% every years.

While the flexible supply of USD allows for responsive monetary policy, it also introduces risks of inflation and devaluation. In contrast, the fixed and predictable supplies of gold and Bitcoin offer protections against inflation. But this also means that their supplies cannot adjust in response to changes in demand or economic conditions.

The decentralized nature of Bitcoin and the physical and universal appeal of gold offer alternatives to fiat currencies. These are however tied to the economic stability and policies of specific countries. As digital transactions become more widespread and geopolitical tensions influence financial policies, the appeal of decentralized or universally recognized stores of value may increase.

Conclusion

Understanding the issuance mechanisms of USD, gold, and Bitcoin reveals deep insights into their roles as currencies or investments. While USD offers flexibility and responsiveness to economic conditions, gold and Bitcoin provide scarcity and predictability. This  appeals to those wary of inflation or governmental overreach. Each serves different needs and comes with its own set of risks and opportunities. They shape their suitability for investors and users across different geopolitical and economical contexts.

 

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