Since it was created in 2009 by the pseudonymous Satoshi Nakomoto, the price of Bitcoin has skyrocketed and garnered worldwide attention. Since April 2021, Bitcoin’s market cap has exceeded $1 trillion. This has led many investors to turn to the popular cryptocurrency as an investment when comparing Bitcoin to gold.
Traditionally, investors and commodity traders have stored their wealth in property, stocks, bonds or gold. Gold has often been a safe hedge against rising prices for long periods of time, but digital currencies are a new asset that is increasingly seen as an investment as well as a medium for day-to-day transactions. Bitcoin has accordingly earned a reputation as “digital gold.”
When comparing bitcoin to gold, let’s look at the two top options today and how they stack up against each other when it comes to protecting their value and wealth over the long term.
What is a Store of Value?
A store of value is an asset that can be stored and retrieved over time without losing its value.
Using this definition, it is clear that fiat money is a poor store of value. Cash is useful as a daily medium of exchange and a way to maintain short-term liquidity, but it does not hold its value well over time.
There have been more than 50 recorded hyperinflation events in different monetary systems around the world. Hyperinflation occurs when the currency depreciates at a rapid rate of about 50% per month. It is characterized by a sharp increase in the cost of goods and services and, accordingly, the loss of purchasing power. While hyperinflation is rare in developed countries, inflation itself is quite common.
Inflation is a standard tool used by governments around the world to control the money supply. Governments slightly devalue their currencies each year as a way to encourage people to increase spending or investment, in the hope that it will stimulate economic growth by creating more jobs.
This means your money loses value over time, so storing your wealth in an asset that maintains value is the only way to keep up. That’s why people invest in stocks, bonds, real estate, and other assets that are likely to increase or maintain their value over time.
However, although they are preferred to cash, these investment instruments go through cycles of ups and downs. To make matters worse, price movements are interrelated – so market conditions that affect one are likely to affect the others.
Therefore, an asset that is unaffected by market variables is essential. Here is Bitcoin vs. The gold argument comes into play. For thousands of years, gold has been the world’s primary store of value. It has outlived the monetary systems of countless empires and city-states, many of which no longer exist.
Investors often switch to assets like gold and Bitcoin in times of market turbulence as they do not move with the rest of the market. In fact, their value often rises in adverse market conditions as investors move their funds en masse. When measuring gold with Bitcoin, investors see them as “safe havens” due to their stability. Investors are confident of maintaining the value of their wealth even if they don’t make significant gains.
Why Is Gold a Popular Store of Value?
Before comparing Bitcoin to gold, it’s important to understand why gold is so attractive to long-term investors. Money has been used as a medium of exchange since human civilization realized the limits of the barter system. Various materials were used as currency, such as bones, sticks, marine animals, livestock, metal and paper. Throughout the ages, only gold has retained its value and attractiveness. The first signs of gold coins in history date back to 500 BC.
People valued gold for its unique properties and beautiful appearance. They see the precious metal as a way to pass on and preserve their wealth from generation to generation. Because gold is an inert metal, it does not oxidize (rust) or react with other elements. Its versatility also means that gold can be melted down and turned into coins.
Throughout modern history, many countries have adopted the gold standard monetary system, the USA followed in 1879. The term “gold standard” refers to a monetary system in which the value of paper money is backed by the gold stored in the hands of the government.
While this system is effective in combating inflation and deflation, it limits governments’ ability to freely print their own currencies. This became a problem for governments trying to finance wars. The United States began to move away from the gold standard in 1933. In 1971, to avoid an inevitable runaway in gold reserves, the Nixon administration halted convertibility, which meant that other countries could no longer use their dollars for gold. In 1973, the government completely abolished the gold standard.
Eventually, the US dollar became the world’s reserve currency, and many global currencies pegged their exchange rates to it instead of gold.
Why is gold so highly regarded as a store of value? Throughout history, gold has held its value as an insurance against uncertain times. Properties that add to its immense value include durability, scarcity, portability, transformability, and emotional appeal as shiny objects tend to be more appealing.
Gold also has practical uses. It has been used in jewelry making since ancient times and more recently in the manufacture of electronic components. Supply is low, stable and predictable, as gold must be mined and processed. Therefore, gold has little correlation with other asset classes such as stocks and currencies.
Investors who are wary of stock market fluctuations found it under their comfort. The precious metal helped as a hedge in market corrections. Even if its value does not rise, it tends to remain static as other assets fall. These factors contribute to gold’s long-standing popularity as a solid safe-haven asset.
Now, Bitcoin threatens to steal the shine of gold as the world-class store of value. But how does this digital asset measure up to the original store of value in our Bitcoin vs gold comparison?
Why Is Bitcoin a Store of Value?
Unlike gold, which is primarily used to make jewelry, cryptocurrencies and some electronic components, Bitcoin by itself has no industrial use. However, it can be considered a medium of exchange.
Bitcoin is inherently a store of value because it is durable and scarce. The total supply of Bitcoin is limited to 21 million and will never be more than this amount.
Also, Bitcoin is a decentralized digital asset based on a global network of nodes and miners that operate and make this possible without being controlled by central banks or governments. This provides some privacy to Bitcoin users and also increases their security. An ideal store of value should function as a medium of exchange so that it can be transformed as needed. Bitcoin is tradable, portable, divisible, and exchangeable as it is widely adopted.
Now that both assets are discussed, let’s compare Bitcoin and gold side by side.
Bitcoin or Gold?
Comparisons between Bitcoin and gold are hard to avoid, as their similarities are striking. Both are a good store of value and a safe haven in a sea of market turbulence. Here, we compare Bitcoin to gold by examining the factors that give them their value.
Scarcity
When measuring gold with Bitcoin, scarcity is the key feature of a good store of value. If an asset is easy to obtain or simply abundant, it is easy to increase its amount. As a result, however, the price drops, making it a poor store of value. On the other hand, when the supply of an asset is limited, increased demand increases the price of the asset, maintaining and increasing its value.
Scarcity is one of gold’s key properties, giving it an advantage over other metals and materials as a store of value. Relatively rare, expensive and labor-intensive for mining and processing. Accordingly, it is not easy to increase the gold supply. Therefore, when the demand for gold increases, it is not easy to increase the supply and meet the market need. Compared to other metals such as silver and copper, which are more abundant and easier to mine, gold is rarer, making it the dominant store of value throughout the ages.
But you know what’s even scarcer than gold? bitcoin. While gold is relatively scarce, Bitcoin is certainly scarce. Only 21,000,000 Bitcoins will exist and no more will be mined after 2140. Although gold has been mined for centuries, the world still holds the metal to be mined.
For scarcity Bitcoin has a fixed supply and is therefore a better store of value than gold.
Interchangeability
Interchangeability defines the quality of being interchangeable and uniform, which is a hallmark of a good store of value. This quality facilitates exchange because exchangeability means that all equivalent units of the asset are of equal value and can be exchanged between various markets and locations.
Mercedes and Jeep are both cars, but they are not directly interchangeable because each vehicle has a number of different and unique features that affect its value. However, gold is generally tradable – an ounce of pure gold is worth the same as an ounce of pure gold anywhere. However, in some cases, gold cannot be exchanged.
Impure gold is not of the same value as pure gold. Testing gold purity is not easy for everyone, and there are additional challenges associated with using the same measurement standards around the world.
On the other hand, Bitcoin vs. In the gold argument, Bitcoin can always be exchanged. A Bitcoin is the same as any other Bitcoin and more importantly, it cannot be faked. In summary, Bitcoin is more exchangeable than gold.
Divisibility
A store of value should be easy to divide into smaller units for a more accurate transfer of value. This is where the gold falls. Gold is a dense metal, so a small amount still represents great value. This makes it difficult to transfer smaller units of value, even with small gold coins.
This is why paper money became necessary: it facilitated the division of gold into smaller, more exchangeable units. But paper money no longer represents gold, so the divisibility problem with gold remains. Also, splitting gold requires physical effort – melting, weighing, analyzing and minting new coins.
Conversely, Bitcoin has no such problem. Bitcoin is literally infinitely divisible. One millionth of a Bitcoin is called a Satoshi. Therefore, no matter how valuable Bitcoin is, it will still be possible to use it and buy a glass of your favorite beer. In terms of this aspect of Bitcoin’s divisibility into gold, Bitcoin is the clear winner here.
Portability
When evaluating Bitcoin and gold, one of the important considerations should be the portability of the store of value. Gold is a dense metal and is heavy to carry. Large volume shipping is expensive, making it inconvenient for long-distance trade. Cross-border regulations on gold make it somewhat unsuitable for international trade.
Unlike Bitcoin, there is no portability issue. As a purely digital asset, Bitcoin can be stored on a thumb-sized drive or even online, regardless of its value, and can be accessed from anywhere in the world with an internet connection.
Bitcoin transfer is fast and inexpensive. For less than a dollar, you can safely move an enormous amount of Bitcoin in minutes. This ultimately makes Bitcoin infinitely more portable than gold.
Community Adoption
Society must accept an asset to be a good store of value. This is important because people tend to value things that have long been considered valuable. Gold has been considered valuable by almost every human civilization since ancient times and therefore has great appeal as a store of value. Additionally, gold has practical applications as it is used in coins, jewelry, and electronics.
When it comes to comparing Bitcoin to gold, gold is far superior to Bitcoin in this regard. Bitcoin has been on the market for a little over a decade, and although it has gained impressive adoption in a short time, it still lags far behind gold. Many investors and the general public view Bitcoin as a niche that is not yet fully understood.
Currently, gold has a market cap of around $11 trillion, while Bitcoin has a market cap of $500 million. Obviously, gold is being adopted more globally than Bitcoin. However, Bitcoin is rapidly gaining popularity.
Government Regulations
The idea of a decentralized currency that is not under anyone’s control doesn’t quite fit central banks and governments around the world. This has led to negative government policies regarding Bitcoin, from strict regulations to outright bans in some places.
Such a threat does not dwell on the legitimacy of gold, which makes it Bitcoin vs. makes it the clear winner of this aspect of the gold debate.
Final Words
As governments print money and devalue currencies, gold and Bitcoin are excellent hedges against runaway inflation rates. Gold has been used for centuries and is still a good store of value and a trusted safe-haven asset. However, Bitcoin is the new kid on the block and shows improved scarcity, divisibility and transferability. This consequently positions Bitcoin as a better store of value when comparing Bitcoin to gold.
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