Is Bitcoin āDigital Gold'?
Image: CoinMarketCap
For years, proponents of bitcoin have been calling it ādigital gold,ā claiming the worldās oldest cryptocurrency can serve as a hedge against global economic uncertainty ā just like the precious metal.
šŖ The argument in favor: Unlike fiat currencies or stocks, bitcoin canāt be diluted in times of crisis since thereās only a finite number of coins in existence (its supply is capped at 21 million). Theoretically, this means holding bitcoin is a way to hedge against inflation or a stock market crash, both of which are currently happening in Russia as a result of global sanctions.
š¢ By the numbersā¦ When Moscow attacked Ukraine on February 23, bitcoin immediately fell ~10% before regaining all of that value within a day. On the other hand, gold quickly spiked ~3% before losing all of that value over the next day.
Since the war began, bitcoin has gained 2.6% while gold is up 3.1%.
- Bitcoin trading activity in Russia and Ukraineās local currencies reached its highest levels in months last week. Crypto donations to Ukraine have now surpassed $83.5 million, with more than half of that sum going directly to the countryās government.
ā Yes, butā¦ While it appears crypto has seen a resurgence due to the conflict in Ukraine, many are still hesitant to call bitcoin "digital gold." Instead, they argue that itās acted more like a tech stock in recent years.
- Despite US inflation being at historic highs, bitcoin has lost more than 40% of its value since a recent peak in November, mirroring falls seen in stocks like Meta and Netflix. The price of gold has increased nearly 10% over that same period.
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Sprinkles in favor of bitcoin as ādigital goldā
- Some commentators argue that bitcoin and gold share many similar characteristics, including built-in rarity, high transparency, high liquidity, and great baseline value.
- Others point out that the Russia-Ukraine conflict has prompted the price of crypto to become relatively disconnected from the stock market, which they contend means crypto acts like ādigital goldā in times of global crisis.
āHistorically, gold has been considered a safe-haven asset. During a financial crisis or recession, the yellow metal has been often used as a hedge against stock market volatility. Bitcoin, meanwhile, has been dubbed ādigital goldā in the past and itās a fair comparison with gold as they share similar characteristicsā¦
While Bitcoin may not be a safe-haven asset yet, it has the potential to become one, since it is expected to increase in value and retain it during times of economic turbulence owing to its uncorrelated statusā¦
The two assets have a few things in common:
Rarity: Both gold and bitcoin are scarce resources and cannot be printed like money. It is predicted that by 2140, all 21 million Bitcoin would be in circulation due to mining.
Transparency: Gold has an established system of trading, weighing and tracking, which is preciseā¦ Bitcoin is also difficult to corrupt, thanks to its encrypted, decentralized system and complicated algorithms, making it one of the most secure systems being developed for the future as it is tough to manipulate.
Liquidity: Both gold and bitcoin have very liquid markets and can be exchanged for fiat money.
Baseline Value: Gold has myriad applications from luxury items like jewellery to specialized applications in dentistry, electronics and more. In addition to ushering in a new focus on blockchain technology, bitcoin itself has tremendous baseline value as well. Billions of people around the world who lack access to banking infrastructure and traditional means of finance, can send value across the globe for close to no fee.
That said, Bitcoin's true potential as a means of banking for those without access to traditional banks is yet to be fully developed.ā
Sprinkles against bitcoin as ādigital goldā
- Some commentators argue that bitcoin and gold share many similar characteristics, including built-in rarity, high transparency, high liquidity, and great baseline value.
- Others point out that the Russia-Ukraine conflict has prompted the price of crypto to become relatively disconnected from the stock market, which they contend means crypto acts like ādigital goldā in times of global crisis.
āIf there were a time for Bitcoin to shine, a geopolitical crisis would seem to be it.
After all, Bitcoin's biggest backers argue that the cryptocurrency is a necessary alternative to fiat currency because central banks and governments can't be trusted and government-backed currencies lose value through inflation.
In theory, Bitcoin solves both of those problems as a decentralized currency on the blockchain with a mathematically limited supply at 21 million. In practice, it's not so simple.
When Russia invaded Ukraine on Wednesday night, the price of Bitcoin didn't jump as the bullish logic would suggest. Instead, it crashed, falling more than 4% in just 30 minutes.
It's true that Bitcoin recovered those losses later on Thursday, but that was only after other risk assets came storming backā¦
While risk assets like Bitcoin and tech stocks initially flopped, gold rallied, with spot prices jumping 3% as war broke out. Though Bitcoin bulls like to refer the world's largest cryptocurrency as "digital gold," the recent price action on Bitcoin belies that notion, showing that it isn't the safe haven asset it's often billed asā¦
That a geopolitical upheaval sent Bitcoin holders fleeing for safer assets, rather than causing them to double down on a currency that's supposed to be a solution to the problems with fiat currency, demonstrates that Bitcoin functions primarily as a form of speculation rather than a currency or safe haven. If that weren't true, investors wouldn't be afraid to hold it during uncertain times, and Bitcoin wouldn't be so volatile to begin with.ā
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