Is Bitcoin a Substitute For Gold?

June 8, 2022
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An increasing number of people think Bitcoin could eventually replace gold as asafe haven.

As big names like Elon Musk invest in Bitcoin, the term digital gold is being usedto characterize cryptocurrencies.

But can BTC replace gold?

A number of people believe that bitcoin could soon replace gold as safe heaven against the depreciating value of the dollar against gold. This is just speculation, but it is curious to see the exuberance of people regarding bitcoin.

Besides the fact that there is a multitude of different digital coins, what’s uniqueabout Bitcoin is that its supply is fixed.

Only 21 million bitcoins will ever be created in this industry. There are around 47million millionaires existing in the world; if each of them wanted to have asingle bitcoin, not all of them would be able to acquire a Bitcoin. Thesesupply limitations make Bitcoin a bullish entity.

Inthis guide we’ll answer this question.

Bitcoin andGold: How do they compare?

What’s interesting about gold and Bitcoin is that the supply is fixed. This means theprice is directly linked to demand. This means gold has historically been used as a store of value. As such, it’s seen as a great hedge against inflation.

Research has repeatedly proven that gold keeps its value extraordinarily well during recessions. This was especially true during the 2007-2009 financial crisis, when gold's total performance was 19% and the US equity market plunged 35%.

Onthe other hand, Bitcoin has no fixed supply. As such, it’s seen as a good hedge against government policies.

For example, many governments want to impose negative interest rates on financialassets. Negative interest rates would make holding traditional financial assets like stocks, bonds, and cash a bad deal.

However, Bitcoin is a traditional financial asset. It’s just stored digitally. As such,it doesn’t have to pay interest to anyone.

How volatility affects gold and Bitcoin?

If you look at the volatility of gold and Bitcoin, you’ll see that the price of Bitcoin is more volatile than the price of gold. This is the red herring of digital assets.

Why is Bitcoin more volatile than gold? This is due to the fact that it’s a new asset class. As such, investors are trying to figure out how to invest in it. If you want to invest in gold, you’ve had plenty of time to research it. As such, most investors are going to invest in something that’s less volatile.

Gold protects against central bank policies

Many people think that gold is a good hedge against central bank policies like negative interest rates. However, this isn’t the case. What you see in the chart above is that the price of gold is linked to economic growth. This is due to demand. As such, it’s not affected by central bank policies.

Bitcoinprotects against government abuse

Another red herring people have with Bitcoin is that it’s a good substitute for golddue to its protection against government abuse. However, this isn’t the case either.

First, governments aren’t the only ones abusing financial assets. As such, you canprotect yourself from this too.

When people think about crypto currencies and Bitcoin, they often think about money laundering, financing terrorism, and other immoral activities. As such, this isa red herring. If you can’t trust the government or financial institutions toprotect your money, you don’t need Bitcoin.

Can BTC replace gold?

Thereare many reasons why BTC can’t replace gold. Here are a few of them:

Cryptos aren’t a hedge against inflation

Any asset that is prone to significant inflation cannot be considered a good storeof value. Inflation reduces the value of currency when its supply increases, something that happens frequently with crypto currencies since one can create them.  The fast growth of crypto pools fundamentally erodes their value.

Meanwhile, gold is somehow unaffected by inflation. In fact, its price rises during periods of inflation as investors flock to the precious metal as a safe haven.

The overall crypto infrastructure

Many cryptocurrencies use blockchain technology, which is a decentralized system that tracks the transaction of digital assets.

To meet worldwide demand, Bitcoin relies on off-chain transactions, in which users buy and sell coins outside of the blockchain network, therefore defeating the fundamental purpose of utilizing the technology in the first place.

Gold, on the other hand, is a global commodity that can be obtained safely through a number of channels, and in a number of forms. Access to gold does not require a technical backbone, and since it is so well-established, rules have been inplace for a long time to regulate how it is sold, kept, and spent.

Gold has been around for ages, outlasting failing fiat currencies and surviving global market disasters, where as cryptocurrency is insecure and in its infancy.

When any currency has no fundamental value and exposes people to wild volatility, it will never be as reliable as gold. As a result, although pro-crypto enthusiasts promote it as the new gold, however BTC can’t replace gold.

What to look for in 2022?

In short, both gold and bitcoin are expected to continue optimistic in the coming year, and there are no signs in the market that either commodity will be phased out very soon.

Both gold and bitcoin perform comparable speculative roles but have significantly distinct individual qualities and application cases, making them complementary investments rather than rivals.

Although more institutional money is expected to flow into Bitcoin in the coming year, this does not represent an existential danger to gold.

It's more likely that gold and Bitcoin will become tandem hedges, with prices becoming tightly tied. In other words, we appear to be facing a future with two big inflation hedges rather than one.

Final thoughts

With all of this volatility, we are certainly witnessing a flight to safety, but ifyou are a diversified investor, perhaps you should buy both gold and Bitcoin rather than debate which is better.

By focusing on items you can control, such as your portfolio, you may share in profits while limiting your exposure in losses.

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