Alexander Vasiliev He is co-founder and CCO of the global payments network Mercuryo.
Since Bitcoin began to gain popularity, many people have called it “digital gold.”
And for valid reasons.
While the anonymous creator of the cryptocurrency, Satoshi Nakamoto, originally intended for Bitcoin to function as a peer-to-peer (P2P) electronic cash system, BTC also possesses excellent store of value and safe-haven asset qualities.
Gold has a similar store of valuable properties, and many conservative investors consider the precious metal to be one of the safest traditional investment instruments on the market. There is also a popular belief that the financial instrument is a good hedge against inflation.
However, numerous experts from the same group also criticize Bitcoin for its lack of stability, often calling the cryptocurrency a bubble.
That said, such statements about gold and bitcoin do not reflect the whole truth.
Bitcoin beats gold in terms of purchasing power
To see the whole picture, it is essential to analyze gold and bitcoin with respect to the performance of the two financial instruments in terms of inflation hedges, stores of value, and safe-haven assets.
According to the Bureau of Labor Statistics’ Consumer Price Index (CPI), the US dollar has lost 11% of its purchasing power due to inflation in the last five years.
This should come as no surprise, as fiat currencies like the USD are inflationary due to a lack of fixed supply and ongoing money printing practices by central banks.
For an asset to be a decent inflation hedge, it must maintain value growth equal to or greater than the inflation rate to protect investors against depreciation in the price of fiat currencies.
If we take a look at the SPDR Gold Shares’ (GLD) performance in the last five years through the graph above, we can see that the precious metal has maintained an increase in value of almost 54%, which is almost five times higher than the inflation rate of the dollar.
For that reason, we can call the instrument an inflation hedge. But is it better in this field than bitcoin?
The simple answer is no. The table above clearly shows that in the last five years, even after the recent bitcoin price crash and the bear market of 2018, BTC maintained a price appreciation of almost 7500%, which is more than 138 and 680 times higher than that of the gold and the USD inflation rate, respectively.
More than just an inflation hedge
Throughout its twelve-year history, bitcoin has outperformed all other asset classes, increasing its purchasing power so significantly that it makes it clear that cryptocurrency is more than just a hedge of inflation.
Due to the limited supply of BTC capped at 21 million coins, as well as the halving mechanism that cuts the supply of new coins in half roughly every four years, the digital asset features a deflationary monetary policy that is hard-coded. at the protocol level.
For that reason, there is no way to increase the supply of bitcoins at a time when the demand for cryptocurrencies is greatest.
At the same time, due to the continuously decreasing flow of new supply, BTC will experience long-term price appreciation even if demand remains at the same level as it is now.
This, in addition to its durability due to its highly resistant and immutable blockchain network, makes Bitcoin an excellent store of value.
While gold is also a very rare asset, like oil, its production can be increased or decreased based on current demand.
However, due to the large amount of stocks present on Earth and the complexity of gold mining, the annual production rate of the precious metal is generally around 2% of the total supply.
For that reason and due to the qualities of gold that make it impossible to destroy or synthesize the asset from other materials, the precious metal is also a good store of value that has experienced long-term price appreciation.
But, in this field, bitcoin has a great advantage over gold. While BTC can easily be used for P2P payments without intermediaries, there is no system to buy products or services with a gold bar.
In terms of being a safe-haven asset, a financial instrument that can retain or increase in value when the general market is in crisis, both bitcoin and gold maintain a relatively low correlation with other asset classes.
Therefore, both instruments have safe haven asset qualities that distinguish them from others in this field.
Bitcoin is on its way to becoming a viable alternative to gold
Bitcoin has the qualities to be a viable alternative to gold and other precious metals in terms of inflation hedging, store of value, and safe haven asset.
Despite criticism, many companies and institutional investors have chosen to invest in bitcoin to safeguard their assets during the pandemic and the economic fallout that followed.
Tesla is an excellent case study for that, even with Elon Musk’s recent criticisms of BTC’s high energy use. The electric car manufacturer generated 23% of your first quarter 2021 profit from just selling some of your bitcoin holdings.
And with an excellent store of value properties, increased purchasing power, and high versatility, bitcoin has the potential to take the lead from gold and become the standard asset for fighting inflation and guarding against general market turmoil.
This is a guest post from Alexander Vasiliev. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.