Better Than Gold: Will Bitcoin Replace Precious Metals?

Alisa Tkach

An inflation hedge of the 21st century?

An inflation hedge of the 21st century?

Ever since Bitcoin captured the minds of a broader audience, people started labeling it. “Digital gold” – is one of the most widely used nicknames the coin has ever been given. But is it really fair to compare the innovative currency to one of the oldest assets favored by conservative investors?

Before jumping to conclusions, it’s worth analyzing what makes both of these assets special. Apart from being a safe haven, gold is also known for hedging against inflation and storing value. Somewhat fair price along with its price deviation equally contribute to the consistency of the asset. One would say Bitcoin can hardly keep up with the qualities of gold, but let’s proceed from analytics. 

Bitcoin vs. Gold: The Ultimate Uncertainty 

Controversial from the start, Bitcoin hardly leaves anyone indifferent. We’ve recently witnessed a drastic change of minds towards crypto, mainly in its favor. But skeptics remain unconvinced. 

The opposite of stability

Various marker experts and conservative institutions criticize Bitcoin for having multiple flaws, including being a rather flaky asset only worth what people are willing to pay for it. 

Converged values

Others assume that the value of gold and digital gold will eventually converge. 

Overpriced asset

And some believe that despite being a promising asset, Bitcoin is still overpriced – and the network effect is to blame. 

Favored by millennials

There is another popular belief: people from different generations tend to lean toward one of the assets more. While boomers favor physical gold, millennials more often choose the digital one. 

And yet, regardless of what people think of them, both assets’ true characteristics are rather subjective. 

Inflation hedge

Can we say that gold provides an inflation hedge? Not necessarily, considering there’s no solid definition of the term. When we look at the real price chart of these two assets, we can see that gold’s price has fluctuated over time. 

At the same time, it hasn’t really shown a visible upward or downward trend. Does it mean that gold could be an inflation hedge? Again, that’s still uncertain. However, the situation with Bitcoin is more clear as its price has trended tremendously, suggesting the asset is unlikely to be an inflation hedge.

Purchasing power

And if we look at the purchasing power of these two, we’ll make a discovery. For this review, comparing assets’ price to the portfolio of any goods instead of the inflation index appears to be more graphic. So when we check BTC and gold’s price to S&P 500 – specifically, how many shares we’re able to purchase with either BTC or gold – it becomes obvious that gold’s price has trended down. On the other hand, Bitcoin’s purchasing power keeps on rising. 

Comparing the price of Bitcoin directly to the price of gold over a certain time period illustrates that the purchasing power of Bitcoin (judging by the number of ounces you can buy with 1 BTC) has increased, alongside inflation rate and gold’s price. And increasing purchasing power is a great characteristic for an asset.  

Store of value

Now, what about offering a store of value? In certain cases, it can be the case for both gold and Bitcoin. In their research, Paul Jones and Lorenzo Giorgianni suggest that assets like gold and Bitcoin can become solid inflation hedges and stores of value during uncertain times. 

They define a store of value as an ability to save purchasing power in the future, which is fair enough for both of the assets. At the same time, they might not be a good fit for representing an inflation hedge. 

Safe haven

As for the safe-haven label, it’s just as tricky as the rest of the criteria as there’s no universal definition of the term. Even if we assume that being a safe haven means that the asset’s performance stays positive while the stock market’s one is negative, neither gold nor Bitcoin has shown a consistent track record. 

Real value

And how do we even determine the proper value of Bitcoin or gold? Is it even possible? According to Buffet and some other prolific investors, currency investments are the riskiest ones. And the same goes for gold and Bitcoin. As opposed to real estate or businesses, our two assets produce no income and cash flows. That’s why it is tricky to put a value on them. 

When we say that Bitcoin is digital gold, we assume that the value of Bitcoin and gold are alike. But what if we actually count the value of all the BTC mined to the date and compare it to the value of gold that has been mined so far? That will lead us to the conclusion that Bitcoin’s price is way higher. And yet, that still doesn’t mean that the more Bitcoins we mine, the higher the price gets. 

The Bottom Line

Bitcoin enthusiasts believe that their favorite digital asset’s price can rise to $500,000 because of certain qualities such as being an inflation hedge, safe haven, or storing value. If we turn to other theories and calculate both assets’ fair prices, we might find out that both of them are already overpriced. 

The truth is, comparing asset values is a thankless job. Various criteria will give you a new perspective, and even time won’t arbitrate. At the end of the day, it becomes a strictly objective decision on which asset to go with.

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