Introduction
Bitcoin is the first ever cryptocurrency and blockchain. Bitcoin is often referred to as digital gold. However, the world has real gold thousands of years before Bitcoin. There is always a debate between Bitcoin and gold proponents about which is the best investment option.
This article will discuss in detail the important aspects related to Bitcoin and Gold and try to find out which is a better financial instrument for investors.
What is Bitcoin?
Bitcoin was invented as a decentralized blockchain by Satoshi Nakamoto in 2009. It is often attributed as the first-ever DeFi coin. It was able to keep operating without the presence of a centralized authority. Therefore, Bitcoin was used as a medium of exchange.
The Bitcoin Whitepaper published by its pseudonymous creator that it was an alternative to fiat currency. During the last 12 years, Bitcoin was able to gain massive traction.
Last year, Bitcoin gained an ATH of $69K. At the time, the entire crypto market cap crosses the threshold of $3 trillion. Since Bitcoin was an open-sourced project, several other programmers adopted its blockchain programming and use it to create new blockchain projects.
Bitcoin is however a standalone decentralized blockchain that does not have any private company or government regulators operating it.
Bitcoin blockchain has issued a digital asset of the same name that is denoted as BTC. Bitcoin blockchain uses the PoW consensus model for the verification of transactions.
What is Gold?
Gold is the 79th element in the period table and it is denoted by the symbol Au. Gold is classified as a metal and it is considered to be one of the best conductors of electricity. Since ancient times, Gold has been used for adoration and as a symbol of status.
Gold was also adopted by the financial markets and central banks as a national reserve for a long duration. Therefore, it is no wonder that today Gold is one of the most well-known and widely accepted commodities in the world.
Furthermore, gold also holds this value on account of its rarity on earth. As per an estimate, the total concentration of gold in the earth’s crust is estimated to be around 0.0011 ppm and 0.0031 ppm.
In addition to the psychological factor gold is also traded and valued for its high demand and limited supply. Today, people purchase gold not just as jewelry and luxury items but also as an investment to utilize their savings.
What is an Inflation Hedge?
An inflation Hedge is a financial instrument that can prevent the loss of savings on account of increasing inflation. It means that people can purchase that product for a smaller cost and make sure that their savings do not devalue over time on account of the increase in the price.
They may also sell the inflation hedge in the future after it has accumulated more value concerning time. If a person chooses to keep their savings in the form of fiat currencies they are bound to lose their value on account of the constant rate of increase in inflation.
Therefore, many people are always looking to distribute their investment options into different types of inflation hedges to make sure that they can secure their investments.
Additionally, a hedge is the quality of an investment product that is used to offset another product. Therefore, a hedge against inflation can also be described as an investment instrument that is connected in a negative correlation with fiat currency savings.
For example, as the value of the fiat currency would fall the cost of the hedge against inflation will keep increasing and vice versa. As per Emily man from Redpoint Ventures, hedge-against-inflation products start to show an inverse correlation during volatile time brackets.
Differences Between Inflation Hedge and Store of Value
In many cases, investors have heard terms like Hedge against Inflation and store of value when talking about assets like gold and Bitcoin, etc. Investors need to understand that there is a small distinction between both terms. Hedge against Inflation is seen as a short-term phenomenon on the other hand store of value is applicable for longer durations.
Furthermore, with a hedge against inflation the emphasis is mainly on the rate of increase in the prices of goods and services in an economy that may be denoted by CPI (Consumer Price Index).
On the other hand, the main focus for the store of value is related to the decreasing value of the fiat currencies that make up the major part of the savings or source of income for most people. This distinction was introduced by Asset Allocation analysts from GMO named Philip Pilkington and James Montier.
Take, for example, equity that can be considered a store of value but is not a hedge against inflation. When discussing the financial properties of any item, it is important to keep both these distinctions in mind.
What are the Requirements for an Asset to Become a Hedge Against Inflation?
To check whether a financial instrument is a hedge against inflation or not, investors can use the following parameters to determine. By understanding the application of all these factors on Gold and Bitcoin, investors can better understand their quality as a hedge against inflation:
Durable
Both Bitcoin and gold are durable because they can last for a long duration without the danger of getting perished. Bitcoin is a digital currency and as long the owner of Bitcoin has their private keys, public keys, and digital wallets stored securely they are not going to lose access to their currencies on account of ownership or change of their Bitcoin.
Bitcoin is intangible therefore it does not erode or get affected by corrosion etc. It is very difficult to destroy.
The same is the case with gold. Once the gold has been molded into a certain shape it is next to impossible to change because it has a very high melting point.
Investors must keep their gold products away from the reach of thieves and robbers. In this manner, there is no doubt that both Bitcoin and hold fulfill this criterion of inflation hedge.
Portable
It is very easy to take Bitcoin from one place to another without exerting any type of physical effort. Bitcoin is digital and it can be moved from one digital wallet account to another in just one click.
People have the ease to move massive amounts of Bitcoins using their mobile phones. In comparison, it is a little more difficult to transport gold from one place to another.
It needs more physical exertion and a greater concentration to keep gold safe in any form and on account of regulations around gold it is not easy to take it from one country to another without going through a lengthy verification process.
Fungible
Bitcoin is a fungible currency which means that one BTC unit is replaceable with another. There are some types of cryptocurrencies such as NFTs that are purposefully non-fungible. On the other hand, gold is semi-fungible.
Gold products are created in different concentration ratios. There are gold coins that have a 24K label and sometimes it is 14K. Therefore, in such cases, gold cannot be considered fully interchangeable on account of its price differences.
Divisible
As per JP Morgan Bitcoin is divisible to eight decimal places meaning up to 1/ 100,000,000. On the other hand, Gold is somewhat divisible but with a ratio of inaccuracy.
Scarce
The total supply of Bitcoin is not infinite and it is capped at 21 million coins maximum. As per estimations, all the Bitcoins would be mined by 2140. On the other hand, gold is also mined and it is also present in a limited and predefined percentage on earth.
However, whenever the price of gold increase its supply also increases in the market as per financial analysts.
Verifiable
All the transactions for Bitcoins are verified using the PoW method on the blockchain. At the same time, all of these transactions are available for everyone on account of its permissionless network structure.
On the other hand, Gold is also verifiable through the legal ownership process. At the same time, there are countless cases where the purity or concentration of gold is forged and can be diluted.
At the same time, it is not easy for consumers to measure the purity of gold without special apparatus and extensive knowledge.
Free from Censorship
Bitcoin is all-inclusive and even miners are unable to have any personalized or biased influence on Bitcoin. Furthermore, Bitcoin has immunity against any type of censorship because it is wholly decentralized.
For the most part, the Bitcoin economy is free from the influence of central governments and private financial enterprises.
On the other hand, governments have regulated gold for a long time ago. People are required to pay taxes on their gold reserves depending on the magnitude and duration of ownership.
Throughout history, governments have been able to impose restrictions on individual investors in terms of gold acquisition and trading.
History
Bitcoin has been around since 2009. During the short tenure, Bitcoin has shown consistent growth. In contrast, Gold has been around in human civilizations for more than 7000 years according to historians.
Therefore, it is almost impossible or very unlikely that people are going to lose faith in gold and it means that gold risk is considerably lower in comparison to Bitcoin.
Utility for Bitcoin and Gold
Bitcoin and Gold both are often compared with each other to claim the championship for being the better investment option. However, when it comes to deciding what is better for investors they must ensure what use cases these options offer. Here is a detailed view of utilities offered by Bitcoin and Gold:
Luxury Item
Gold is often used as a luxury product and a symbol of status. Many international sports championships award their winners with gold trophies or medals. On the other hand, the richest people in the world like to wear gold jewelry to symbolize their wealth and status.
The tradition of using gold as a luxury product has been followed for thousands of years. Therefore, people still tend to use gold as a way to express of their financial standing. On the other hand, Bitcoin can be seen as a semblance of wealth.
However, people do not as a rule wear or display their Bitcoin wallet value in public like real gold.
Direct Trade
Gold is not as frequently used for direct trading among retail investors anymore. Most middle to low-income households can purchase gold jewelry or coins as an investment. Meanwhile, there are whale investors who can acquire massive amounts of gold reserves over time. However, in most cases, people tend to invest in gold for long durations.
A person is likely to hold gold for a few years before selling it again. On the other hand, Bitcoin is popular equally among short, medium, and long-term investors. Investors can choose trading techniques like day trading or scalping with Bitcoin as well.
Derivatives
Both Bitcoin and Gold have various types of gold derivatives attached to them. It means that investors can gain exposure to these assets without directly investing in them. There are various types of derivatives for gold such as options, forward contracts, futures, leveraged contracts, etc.
On the other hand, Bitcoin investors can also find various BTC derivatives such as perpetual contracts, options, futures, etc.
ETFs
ETFs or exchange-traded funds are financial vehicles that allow investors to gain diversified Bitcoin or gold exposure without investing in them directly.
Investing in ETFs can increase the percentage of profits for the investors or allow them to increase their exposure without violating regulatory requirements. On the other hand, ETFs can also reduce investment risk on account of capital distribution.
Medium of Exchange
Gold started as a medium of exchange in the early days when it was issued as coins by monarchies. However, as the financial systems evolved around the world the gold coins were replaced by paper money. Today, gold is hardly used directly to purchase goods or services.
Meanwhile, Bitcoin is inherently a medium of exchange. Several companies have announced that they are accepting Bitcoin as payment for their goods and/ or services. Furthermore, people also send Bitcoin for international transactions rather than using forex trading to save costs.
Bank Reserves
There are many countries and central banks that kept gold reserves to back their legal tenders. It meant that the governments were allowed to issue money that was equivalent to their national gold reserves.
However, the gold standard was abolished by an executive order issued by President Roosevelt in 1933. From that point, governments adopted the fiat currency system where the value of the legal tender was tied to the goodwill of the government.
On the other hand, Bitcoin which has often been ascribed as digital gold has also been taken up on this path. The government of El Salvador has recognized Bitcoin as a legal tender last year.
The Central American nation is also maintaining a massive Bitcoin as national reserve in its central bank. However, the idea of Bitcoin as a legal tender is not very supported among cryptocurrency proponents.
Medical and Electronic Uses
Bitcoin is not used directly for any type of medicinal purposes at the same time it is not an electronic product. Bitcoin however can operate as a digital ledger and it can be used to send transactions and messages on the digital network.
Therefore, it can be viewed as software as a service. In contrast, gold is also used on occasions in electronic hardware and medical capacity. It is another important but smaller utility for gold that should not be ignored. Gold holds a considerable amount of value as an industrial product.
Enterprise Adoption
Bitcoin has been adopted by financial enterprises for diversification. At the same time, Bitcoin is the blueprint of the entire blockchain or DLT-based technology that can operate as a ledger. It is important to keep in mind that there are several aspects of Bitcoin that have allowed it to have enterprise adoption.
On the other hand, gold has a smaller percentage of enterprise adoption. Companies do not typically invest in gold reserves as an investment. But they may acquire gold for miscellaneous purposes such as raw material and creating trophies etc.
Conclusion
Gold and Bitcoin are two historical rivals. On social media and other online forums, gold moguls and Bitcoin proponents are often facing off against each other. However, investors should keep in mind all the implications related to both Bitcoin and Gold before making any trading decisions.
Depending on market conditions and other factors such as trading strategy investors can benefit from both their gold and Bitcoin allocations.