Harder Than Gold, Faster Than Fiat

In the middle of the 19th century, aluminum was more scarce and desirable than even gold.

As a result, aluminum bullion bars found a place among the national treasures of France, and aluminum jewelry became a symbol of the French aristocracy.

Aluminum, known by its atomic number 13 on the periodic table, is a ubiquitous element, yet it mainly exists intertwined in complex chemical compounds and not in its metallic state.

The complex procedure of transforming aluminum compounds into pure aluminum metal was costly, making aluminum harder to produce than gold. The aluminum price at the time reflected that.

In 1852, aluminum hovered around $37 per ounce, significantly more expensive than gold at $20.67 per ounce.

But aluminum’s fate was about to take a dramatic turn towards the end of the 19th century.

A monumental discovery in 1886 made it possible to produce pure aluminum on an enormous scale at a fraction of the previous cost.

Before this groundbreaking finding, global aluminum production was a mere handful of ounces per month.

After the discovery, America’s leading aluminum company manufactured 800 ounces daily. Within two decades, this company, which would later become Alcoa, made over 1.4 million ounces of aluminum daily.

The price of aluminum plummeted from a staggering $550 per pound in 1852 to a mere $12 in 1880. By the dawn of the 20th century, a pound of aluminum cost approximately 20 cents.

In less than a decade and a half, aluminum transitioned from the planet’s most expensive metal to one of the cheapest.

Nowadays, aluminum is no longer a precious metal fit for royal feasts or a country’s national treasure. It has become an everyday item used in soda cans and cooking foil.

Aluminum’s dramatic transformation from a highly prized metal to an inexpensive household material illustrates “hardness”—the most important characteristic of a good money.

Hardness does not mean something that is necessarily tangible or physically hard, like metal. Instead, it means “hard to produce.” By contrast, “easy money” is easy to produce.

The best way to think of hardness is “resistance to debasement,” which helps make it a good store of value—an essential function of money.

Would you want to put your savings into something somebody else can create without effort or cost?

Of course, you wouldn’t.

It would be like storing your life savings in Chuck E. Cheese arcade tokens, airline frequent flyer miles, aluminum, or government fiat currencies.

What is desirable in a good money is something that someone else cannot make easily.

The Stock-to-Flow (S2F) Ratio

The stock-to-flow (S2F) ratio measures an asset’s hardness.

S2F Ratio = Stock / Flow

The “stock” part refers to the amount of something available, like current stockpiles. It’s the supply already mined. It’s available right away.

The “flow” part refers to the new supply added from production and other sources each year.

A high S2F ratio means that annual supply growth is small relative to the existing supply, which indicates a hard asset resistant to debasement.

A low S2F ratio indicates the opposite. A low S2F ratio means new annual production can easily influence the overall supply—and prices. That’s not desirable for something to function as a store of value.

In the chart below, we can see the hardness of various physical commodities.

No other physical commodity comes close to gold’s hardness or resistance to debasement.

Monetary commodities such as gold and silver have higher S2F ratios. On the other hand, industrial commodities have low S2F ratios, typically around 1x.

With an S2F ratio of 60x, it would take about 60 years of the current production rate to equal the existing gold supply.

Another way to think of it is to look at the inverse of the SF ratio, which is the annual production rate relative to existing stockpiles. So, for example, gold’s yearly production is about a trivial 1.7% of its existing stockpiles.

Two things can explain gold’s uniquely high S2F ratio.

First, gold is indestructible.

Gold doesn’t decay or corrode. That means that most gold people produced even thousands of years ago is still around today and contributing to current stockpiles.

Second, gold has a history of thousands of years of production, unlike other metals.

These two factors make gold’s existing stockpiles so large relative to new production. That means nobody can arbitrarily increase the gold supply, which helps make it a neutral store of value. It’s what gives gold unique and unmatched monetary properties among other metals.

It’s important to clarify that hardness is not the same as scarcity. They are related concepts but not the same thing.

For example, platinum and palladium are scarcer than gold but not hard assets. Current production is high relative to existing stockpiles.

Unlike gold, stockpiles of platinum and palladium have not built up over thousands of years. It’s the primary reason why new supply can easily rock the market.

Because of their low S2F ratios, platinum (0.4x) and palladium (1.1x) are even less suitable as money than silver. Their low S2F ratios indicate they are primarily industrial metals, corresponding to how people use them today. Almost nobody uses platinum and palladium as money.

Here’s the main point.

Hardness is the most important characteristic of a good money. All other monetary characteristics are meaningless if the money is easy for someone to produce.

That’s why the history of money is the history of the hardest asset winning and why gold has always reigned supreme.

But now gold has a serious competitor…

Bitcoin’s S2F ratio today is about 57x, slightly below gold’s.

According to its fixed protocol, we know precisely how Bitcoin’s supply will grow in the future.

A key feature is that the new supply gets cut in half every four years, which causes Bitcoin’s hardness to double every four years.

The process where Bitcoin’s new supply is cut in half every four years is known as the “halving”—or what I like to call “quantitative hardening.”

Here’s another way to think of it.

In 2023, the gold market must absorb roughly 117 million troy ounces of new supply.

In 2024 we can expect that the gold market must absorb slightly more, say 119 million troy ounces of new supply.

In subsequent years we can expect the amount of new supply the gold market must absorb to increase gradually.

Bitcoin has the opposite dynamic. The amount of new supply the market must absorb is constantly shrinking.

In 2023, the Bitcoin market must adsorb roughly 328,500 Bitcoin of new supply.

After the halving in May 2024, the Bitcoin market must adsorb roughly an additional 164,250 Bitcoin of new supply each year until the halving in 2028.

After the halving in 2028, the Bitcoin market must adsorb roughly an additional 82,128 Bitcoin of new supply each year until the halving in 2032.

This process of new supply decreases will continue until the year 2140, when the last Bitcoin will be created. That’s when the total Bitcoin supply will reach 21 million. Today it’s about 19.5 million, meaning the vast majority—about 93%—of the total Bitcoin supply has already been created.

That means only 1.5 million more Bitcoin will be created over the next 117 years at a decreasing rate.

In other words, Bitcoin’s supply will only grow about 7% in the next 117 years. By reference, the US money supply has increased by around 35% since March 2020.

Historically, halvings and their massive supply shocks have catalyzed eye-popping Bitcoin bull markets where Bitcoin has skyrocketed 10x (or more).

The next time Bitcoin’s supply growth will be cut in half will be in May 2024—less than eight months from now.

But this coming halving will be very different…

That’s because Bitcoin’s hardness, as measured by the S2F ratio, will be twice that of gold’s when that happens.

That’s how Bitcoin will soon become the hardest money the world has ever known—in less than eight months. And it will keep getting harder as its S2F ratio approaches infinity.

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