Since Bitcoin was created in 2009 by the pseudonym Satoshi Nakomoto, its price has skyrocketed and it has gained global attention. In April 2021, the market capitalization of Bitcoin crossed the $1 trillion mark. This has led many investors to use the popular cryptocurrency as a store of value when comparing Bitcoin to gold.
Traditionally, commodity investors and traders have stored their wealth in real estate, stocks, bonds or gold. Gold has long generally been a safe hedge against rising prices, but digital currencies are a new asset increasingly seen as a store of value as well as a vehicle for day-to-day transactions. Bitcoin has thus gained the reputation of “digital gold”.
Let’s look at the two most important options today as we compare Bitcoin to gold and how they compare when it comes to preserving their value – and your wealth – over the long term.
What is the store of value?
A store of value is an asset that can be reinvested and increased without losing value over time. 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 means of maintaining liquidity in the short term, but it does not hold its value well over time.
More than 50 episodes of hyperinflation have been observed worldwide in different monetary systems. Hyperinflation occurs when money rapidly loses its value, about 50% per month. It is characterized by a sharp increase in the cost of goods and services and a corresponding loss of purchasing power. While hyperinflation is rare in developed countries, inflation itself is quite common.
Governments devalue their currencies slightly each year to encourage people to spend or invest more, in the hope that this will stimulate economic growth by creating more jobs. That means your money loses value over time, so keeping your wealth in assets that hold 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 appreciate or hold their value over time.
While these investment vehicles are better than cash, they go through ups and downs. Even worse, their price movements are correlated, so market conditions that affect one are likely to affect the other.
Therefore, an asset immune to the vagaries of the market is essential. This is where Bitcoin vs. The gold argument comes into play. Gold has been the world’s most important store of value for thousands of years. It has survived the monetary systems of countless empires and city-states, many of which no longer exist.
Investors typically turn to assets like gold and Bitcoin during times of market turmoil because they don’t move with the rest of the market. In fact, they tend to appreciate in adverse market conditions as investors move their money en masse. When measuring Bitcoin against gold, investors consider it a “safe haven” due to its stability. Even if investors don’t generate significant profits, they are confident that they will retain the value of their assets.
Why is gold a popular store of value?
Before even 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 ever since human civilization realized the limits of the barter system. Various materials have been used as currency, such as bones, sticks, livestock, metal, and paper. Only gold has kept its value and charm through the ages. The first signs of gold coins in history date back to 500 BC.
People appreciated gold for its unique properties and beautiful appearance. They see the precious metal as a way to pass down and preserve their wealth from generation to generation. Since gold is an inert metal, it does not tarnish (rust) or react with other elements. Its versatility also means that gold can be melted down and made into coins.
Throughout modern history, many countries have adopted a gold standard monetary system, followed by the United States in 1879. The term “gold standard” refers to a monetary system in which the value of paper money is guaranteed by government-held gold . .
While this system effectively fights inflation and deflation, it limits the ability of governments to freely print their currencies. This has become a question for governments seeking to finance wars. The United States began abandoning the gold standard in 1933. In 1971, the Nixon administration halted convertibility to prevent the inevitable depletion of gold reserves, which meant other countries could no longer exchange 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 valued as a store of value? Throughout history, gold has held its value as a hedge against uncertain times. Properties that contribute to the tremendous value are durability, scarcity, portability, transformability, and emotional appeal, as shiny objects are often more attractive.
Gold also has practical uses. It has been used since ancient times in the manufacture of jewelry and more recently in the manufacture of electronic components. Supply is low, stable and predictable because the gold has to be mined and worked on.
Investors wary of stock market volatility have found solace in gold. Jalometall has been useful as a hedge against market corrections. While it does not increase in value, it usually remains static as other assets decrease. These factors contribute to gold’s long-term popularity as a solid safe haven.
Now Bitcoin threatens to steal the glory of gold as the main store of value. But how does this digital asset compare to the original store of value in our comparison of Bitcoin to gold?
Why is Bitcoin a store of value?
Unlike gold, which is mostly used to make jewelry, coins, and some electronic components, Bitcoin itself has no industrial use. However, it can be accepted as a medium of exchange. The total supply of Bitcoin is limited to 21 million and there will never be more.
Bitcoin is also a decentralized digital asset that operates without the control of central banks or governments, relying on a global network of nodes and miners to make it happen. This gives Bitcoin users some privacy and also increases security. An ideal store of value should serve as a medium of exchange so that it can be converted as needed. Bitcoin can be traded because it is interchangeable, portable, divisible and widely accepted. Now that both commodities have been discussed, let’s compare Bitcoin side-by-side with gold.