Bitcoin vs Gold
Bitcoin has recently been dubbed the digital gold after users have found it as a great store of value and an equally useful hedge on inflation and poor market performance. With such novel technology now being thrown into the spotlight and beginning to integrate with the traditional economy is it possible that Bitcoin could replace gold?
Find everything you need to know in this short guide about Bitcoin, gold, how they compare and whether Bitcoin could eventually replace this asset.
What Is Bitcoin?
Bitcoin was created in 2009 shortly after the 2008 economic recession. The seismic events of 2008 had revealed a new concern for centralized financial systems and out of this grew the first truly decentralized peer-2-peer cash system: Bitcoin. This network was supposed to be able to simply send financial transactions and the value they hold to one another without the need for any centralized authority. The Bitcoin network would inherit its infrastructure from the community of miners that ran and verified its transaction, and get its security from cryptographic means.
It was this cryptography element that also interested some users to see Bitcoin as a store of value, as a comparable virtual gold. Today this is how we know Bitcoin; it now sets the bar and trends for the entire cryptocurrency market with a total market capitalization of over $840 trillion. Bitcoin also famously has no leader, instead, it is a mysterious figure known as Sitoshi Nakomoto, a riddle yet to be solved by the community. You can find the Bitcoin white paper online written by Satoshi that sets out the core principle of how this technology works.
How Bitcoin Works
You can imagine the Bitcoin network as a big order book full of transactions, or a ledger. Users can send amounts of Bitcoin to other users on this ledger by using a specific address, just like with a traditional bank transaction. But where a bank transaction is sent to the centralized network of that bank to be verified Bitcoin is sent to the decentralized Bitcoin ledger. This is how funds are sent to users.
Miners are the next crucial part of this puzzle as they provide the physical infrastructure for this platform to be run on. Once they have verified the transactions and sorted them into blocks users know that the funds they are sending and receiving are secure, and this is what creates a functioning financial network. These miners then receive rewards for completing this process in BTC which results in more BTC being added to the overall supply.
Bitcoin is famous for being the antagonist to the modern-day inflationary financial system. Although it originally sought to act as a per-2-peer cash system it now seems to be more of an investment than a tool to send money to one another without the need of a centralized authority. Many now perceive Bitcoin’s primary function as a hedge on inflation in traditional economies for example, with some others seeing it as simply a long-term investment.
Why Is Bitcoin a Valuable Asset?
It's difficult to define why Bitcoin has blown up to the extent that it has, but there are clear core concepts that make it an attractive tool in terms of utility but also as a store of value. Here are the three core features of Bitcoin that make it a valuable asset
Bitcoin relies on its community to run and support the network; it uses a proof-of-work system that essentially means miners must solve complex mathematical equations to help support the ecosystem and in turn, they are rewarded with BTC. Therefore engagement with this asset is extremely high due to the rewards nodes can make by contributing to the network infrastructure. It's easy to see how this could quickly develop a sense of community, loyalty, and even a cult-like feeling - run by the people, for the people.
Hype and Integration
Any hype that surrounds blockchain technology peaks within the Bitcoin asset. Once a one-of-a-kind asset, and now the original example of a brand new technology that many think is going to change the world. The hype of Bitcoin over the past five years is clear to see, but this has led to the actual integration of traditional financial streams into the once-fringe asset. While institutional portfolios are not Bitcoin-dominated by any means, they still are now a part of the hype that drives its upward momentum.
Bitcoin, like gold, has a capped supply that cannot be increased once reached. Of course, mining does introduce a new BTC into the Bitcoin supply but this is balanced with its 4-yearly process of Bitcoin halving.
Halving is an inbuilt function within the network that means around every four years, or every 210,000 blocks mined, the rewards miners receive for mining blocks will be cut in half. Halvings reduce the rate at which new coins are created, thereby lowering the availability of new BTC supply and thus driving up demand and the resulting BTC market valuation.
Essentially, it's a control on the supply.
What Is Gold?
Gold is a scarce precious metal that can be used as a luxury good, for practical reasons or as an investment opportunity. Gold was first made a medium for financial trade in 1500 BC and was first used as a tradable asset in 1974 when the first gold futures contract was traded in New York.
Why Is Gold a Valuable Asset?
Gold is an extremely unique asset for investors in the way that it is highly liquid (easily tradable, like cash for example), it has a physical utility (it can be made into jewelry and has a function as a metal), and is no one’s liability (it carries no risk of bankruptcy or default).
For these reasons gold can act as:
A hedge against inflation
A hedge against poor market performance and stress
A portfolio diversifier
A long term investment
A physical material with practical utility
A Comparison: Bitcoin Vs Gold
There are clear similarities to be drawn on when comparing Bitcoin and gold. Both arguably can be used as:
A hedge against inflation
A portfolio diversifier
A long term investment
However, many critics argue these comparisons are misdirected and the crucial difference between both Bitcoin and gold is that Bitcoin’s only real utility is the confidence that its investors have in it. This idea reflects the concerns with fiat currency; a currency is only as valuable as the confidence in the country it represents. Many commentators argue that Bitcoin is no different from fiat in this way, and that actually only gold can act as a real plausible alternative when thinking about a hedge against a poorly performing economy.
Also, the future of Bitcoin is by no means as secure as gold is. Gold will likely always have some kind of intrinsic value as it has done for over 2000 years. Bitcoin is a relatively new phenomenon and has grown at such an unparalleled and astronomical rate that some think it could soon lose value. Gold has historically always risen at a slow but steady pace.
That being said, Bitcoin is fast becoming an integrated part of the modern economy, and with such an exciting technology underpinning it’s becoming harder and harder to see it as an asset that will merely fade away. This is what’s led to its label as digital gold: it can store value, hedge against fiat inflation, and acts as a risky but exciting long-term investment.
As we see other cryptocurrency products like Ethereum and Solana forge new blockchain-based utilities, Bitcoin looks increasingly like gold’s capped, deflationary, digital counterpart in the blockchain metaverse.
While there is an interesting comparison to be made between both Bitcoin and gold, specifically in its store of value, there are ultimately stark differences between them that means it becomes a simple choice when pitting them both against one another.
Ultimately, gold is a less risky asset that historically grows slowly in value; it has real-world utility as a metal and is culturally very significant in terms of fashion items and jewelry.
Bitcoin is a much riskier asset but has historically grown at astronomical rates. The utility of Bitcoin is also somewhat more nuanced than with gold; it has a use-case as a peer-2-peer trading system, but in recent times we have seen it become more as a store of value away from potential inflation and a long term investment because of its sustained growth. Blockchain technology certainly has a very exciting utility that must not be understated; however, Bitcoin is arguably just a symbol or flagship of this technology and does not fully represent it.
Both these assets offer two different ways to hedge against inflation and invest your money in the longer term. However, when it comes down to their risk profiles there isn't much competition and gold certainly comes out on top. But then again, gold cannot compete with the gains Bitcoin makes or the exciting use-case that underpins the technology.