2020-2021’s massive cryptocurrency bull run has brought widespread attention to bitcoin and other blockchain projects. The entire industry has had many doubters over the years but with the recent events many financial experts and institutions are considering the long-term potential of cryptocurrencies. Bitcoin has drawn many comparisons with gold since its inception and speculators have consistently shot them down. However, with the buzz and interest around bitcoin these comparisons are worth exploring.
Gold as a Hedge
Gold has been used as a store of value and a medium of exchange by many civilizations for thousands of years. In more recent times, investors and financial institutions have used gold as a hedge against inflation and the volatility in the stock market. Gold has some applications in consumer goods like jewellery and electronics but around 95% of all gold is used as a store of value.
Gold’s rarity, physical attributes and humans’ fascination with the metal has resulted in economies and societies considering it valuable for generations. Gold cannot be manufactured, it is a rare metal which can only be acquired by the process of mining. The rarity gold offers is very reliable and this leads to gold having almost no correlation with global financial markets. Therefore, it has served as a hedge against the volatility that can often come with investing in the stock market. Investors often buy gold to either soften the blow or even sometimes profit during stock market crashes.
Is Bitcoin Digital Gold?
Bitcoin was launched to the public in early 2009 as a digital currency backed by blockchain technology. It is a peer-to-peer payment system that runs on a decentralized network of computers. The Bitcoin network has certain protocols in place to control the supply and exchange of the currency. This has led to many comparisons with gold over the years.
Bitcoin, just like gold, is not issued by a centralized authority and is not intertwined with other financial instruments. New bitcoins are created by mining, which is the process of validating transactions on the network. Participants of the network use purpose-built supercomputers to do so and are rewarded in bitcoin for their work. The Bitcoin protocol limits the amount of bitcoins at 21 million. It also prevents overflowing of the market by periodically halving the amount of bitcoins that can be mined. As a result, bitcoins become scarce and detached to the influence of outside factors. Proponents of Bitcoin have favored it as a store of value due to the convenience and ease of use it provides.
Gold vs Bitcoin
Gold has been a preferred store of value for many, for centuries. However, recent developments have made retail investors as well as institutions consider bitcoin. Publicly traded companies have added bitcoin to their balance sheets and many hedge funds are interested or are already buying in. Bitcoin and gold have many similarities as well as differences, which can be critical in putting one ahead of the other in the years to come.
Both bitcoin and gold are rare and can only be mined for a certain amount of time. It is difficult to predict how much gold exists on Earth but there are only 21 million bitcoins that can be mined. All of bitcoin’s supply is expected to be mined and in circulation by 2140. As reliable as gold’s rarity is, the bitcoin supply is controlled by the protocol and cannot be changed.
Safety and Transparency
Gold has been trading for centuries now and has a very solid infrastructure around it to do so. This process has been refined and digitized over the years and has become extremely effective. It is very difficult to steal or fake gold. However, being a physical object it is a very challenging task to keep track of all the gold that exists.
The Bitcoin network uses encryption and cryptography to secure the network. It also utilized blockchain technology to carry out transactions on a public ledger. This allows the network to keep a publicly accessible and immutable copy of all transactions conducted on the network. You can see the transfer of bitcoin from one address to another but the ledger does not show who that address belongs to, hence keeping the users’ anonymity.
Gold has been a great option for people looking to hedge against the volatility of other assets since the price of gold has historically been stable. Bitcoin on the other hand is extremely volatile and this has kept many investors at bay.
Bitcoin was launched in 2009 and has since become the fastest asset to reach $1 trillion in market cap and even at such high value, it remains volatile. However, the believers would argue that the volatility comes from the limited adoption and that it would be less of an issue as bitcoin becomes more widely accepted.
Gold is widely used as an investment vehicle but has also served other purposes for quite some time. Gold is a staple in the jewellery industry, it’s used in dentistry and medicine, electronics and even in the aerospace industry. However, as mentioned above a vast majority of this gold is held as a store of wealth.
Bitcoin, similar to gold, is being looked at as value storage but it offers much more than that. The current financial systems put all the control in the hands of banks and millions of people around the world do not have access to banking services. The Bitcoin network allows anyone with an internet connection to use the platform to transfer value across the globe for little to no fee. Additionally, the inception of bitcoin has given birth to many other projects leveraging blockchain technology to solve problems. The blockchain industry presents many opportunities and possibilities that have the potential to revolutionize almost all other industries.
Gold has proven to be a very reliable investment and it can continue to do the same in the future. However, bitcoin offers a very interesting and unique solution to many financial problems we face as a society. We are still in the very early stages of the blockchain industry and bitcoin is at the forefront of it. It has also captured the attention of many big players on the financial landscape which makes the asset difficult to overlook.