Can Bitcoin Replace Gold As A Universal Safe-Haven Asset?
In the formative years of Bitcoin, crypto enthusiasts had the vision of a digital monetary system that would replace fiat money. Just over a decade, the world’s pioneer cryptocurrency has posted mixed results. Even though Bitcoin is now a household name globally, it will likely not replace regular money just yet. Instead, Bitcoin has taken a new dimension as a speculative investment asset rather than just facilitating digital payments.
Bitcoin transactions are only going to get slower, and mining more difficult. These factors mean that the latter option, as an investment asset, is more tenable. Gold is the most prominent store-of-value (SOV) asset. With intrinsic value and insulation from stock market shocks, many investors keep a certain amount of Gold for diversification.
Despite the devastating bear market of 2018, Bitcoin has shown incredible resilience over the years. It is now fair to analyze various Gold Vs. Bitcoin opinions to learn how they mirror each other.
Bitcoin as a Store of Value
In the few years after Bitcoin launch, many crypto projects came along with diverse applications. Some were in Artificial intelligence, Finance, and even data management. Blockchain technology seems to have taken a life of its own, but none of these altcoins could replicate Bitcoin’s success as a store of value.
Whether it is because of the pioneer status, investor confidence or consistency, Bitcoin remains the dominant cryptocurrency. Gold has a similar status among precious metals. With a reputation going as far back as the earliest human civilizations, Gold enjoys a universal value. Central banks have Gold reserves to hedge against slides in their native currencies.
Bitcoin is similar to Gold in the following ways:
- Scarcity– Bitcoin has a restricted supply with a maximum of 21 million bitcoin. Similarly, Gold is mined deep underground, which guarantees a perpetual scarcity. The World Gold Council estimates that the entire supply of Gold, mined and unmined, at about 240 thousand tons. This figure puts into perspective the scarcity of Bitcoin. Most Central Banks use fractional reserve banking, which can flood the economy with cheap money.
- Decentralization– No single party controls the supply of either Gold or Bitcoin. Therefore, holding it as an asset is purely dependent on investor confidence. Accordingly, a Bitcoin holder is not worried about systemic risk from a centralized entity.
Both qualities mean that Bitcoin makes for a decent store of value. With fiat currencies, central banks can freely print money. If this process is unchecked, the result is hyperinflation. Venezuela and Zimbabwe are prime examples of such a scenario.
Both Bitcoin and Gold cannot replace national currencies. The problem of scalability is a flaw in Bitcoin’s original design. Ordinary people need a currency that is highly divisible to sustain commerce. Instead, Bitcoin has an element of scarcity and indivisibility.
In that regard Bitcoin can serve the role of an SOV to those who want to hedge against their native currencies. Crypto is indestructible as it can hold value for an extended time if its prices hold. Portability is one area where Bitcoin has an edge over Gold. Gold is a physical asset, quite heavy in large quantities. On the other hand, Bitcoin is a digital asset that can facilitate payments where possible.
Volatility as a Shortcoming
Bitcoin is historically volatile. Even though the price of Gold is not static, it is nowhere near the volatility of Bitcoin. Bitcoin can fluctuate by thousands of dollars within a week of trading.
Even in Gold rallies and bear markets, such wild swings are not typical. Gold is a safe-haven asset because its price is more or less the same for long periods. This extreme volatility means that Bitcoin cannot yet claim to be a stable asset. In this regard, Gold is still a superior SOV asset. The only scenario of Bitcoin’s volatility being positive is in a rallying Bitcoin market.
The Big Picture
Gold plays a unique role in the financial sector. The precious metal has certain characteristics that resemble how Bitcoin works. However, in their unique ways, they will continue to play specific roles for investors.
Investors who hedge on Gold are interested in stability to diversify their portfolios. Gold has a track record for this particular trait. Bitcoin will most likely not achieve this status soon. Bitcoin holders are by and large speculators who hold the asset hoping for it to appreciate eventually. This amount of speculation is what drives the volatility in Bitcoin.
Indeed, you can see an overlap in the qualities of these assets. However, provided the reasons for holding them vary, they cannot be equated fairly. Gold has the natural advantage of thousands of years’ worth of reputation and networking. In the long-term, Bitcoin has the potential to achieve this status, and play such function in the economy. Until then, Gold remains a preferable SOV asset.
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CoinSpectator, Khareem Sudlow