Is Bitcoin the New Gold?
As cryptocurrency continues to gather momentum in a struggling economy, investors and non-investors alike are beginning to ask the obvious question:
Is Bitcoin the new gold?
At first glance the question seems specious, and five years ago it would have seemed outlandish. But things change fast in the markets, so let’s turn the question inside out a bit and see if it has any validity.
We’ll start with the similarities between Bitcoin and gold, then move on to the differences. There’s no right or wrong answer to the question, but there are a lot of factors to consider.
Bitcoin has been called “digital gold” by more than a few savvy investors in the last year or two, and they can make an interesting and occasionally even compelling case.
Both Bitcoin and gold have had considerable advantages over flat currency recently, mostly due to the fact that they can’t be devalued in the midst of a recession.
That similarity has made Bitcoin a popular choice for many investors, and to some extent the cryptocurrency exchanges that have popped up to facilitate Bitcoin purchases resemble the wave of gold companies that have been offering a stable of products like physical gold IRAs in the last decade.
The other major similarity between Bitcoin and gold is that both tend to gain their value in ways that separate them from many of the mainstream market forces.
Bitcoin is based largely on decentralized technology, and many in the finance world recognized a decade ago that it was the first real product in what was likely an inevitable move toward some kind of viable digital currency.
Gold, too, tends to operate in its own financial universe to some extent. Its value springs from the fact that it’s a scarce physical resource, as was Bitcoin during the early days when just finding ways to purchase it was an arduous task.
The final major similarity between Bitcoin and gold is that they’ve both made explosive gains in the last couple of years, with ROI percentages that have doubled, tripled and more. They’ve both become excellent hedges against inflation, and that seems likely to continue until pandemic issues get fully sorted out.
But there are significant differences between Bitcoin and gold, and they tend to be quite stark, so let’s take a closer look at those.
Gold has a long history of being a relatively stable investment as well as an excellent inflation hedge, but its economic value goes far deeper than that. Gold has actually been the standard for paper currency, and many other cultures have placed a huge value on gold because of its value as a scarce resource. In the current market, gold is seen as one of the ultimate investments to mitigate risk, and when it comes to recent performance it’s been far less volatile than Bitcoin.
The numbers bear this out. Gold has been “languishing” at around $1700, which is down slightly from a high of about $1900 after rising up from lows of $255 in 2019.
Compare that to the Bitcoin numbers, which are downright explosive when viewed side. Pre-Covid, Bitcoin had a value of under $5,000 after attaining a peak value of $17K in 2017.
Its value more than doubled in 2020, hitting $11K in August. For Bitcoin investors, though, the best was yet to come. At the end of the year Bitcoin was up to $29K, and its value has since doubled to approximately $60K.
These gold-rush like numbers point to one of the biggest differences between Bitcoin and gold, which is that the investors are often polar opposites.
Both Bitcoin and gold investors have little faith in paper currency, but Bitcoin investors are the ultimate optimists who believe they’ve discovered the new gold standard. Meanwhile, gold investors tend to take the longer, more pessimistic view, understanding that the market will always be volatile and that gold represents one of the best ways to protect themselves from market ups and downs.
Now that we’ve poked and prodded the question, let’s try to answer it. Is Bitcoin really the new gold?
The most accurate answer at the moment is “not yet.” Bitcoin, like cryptocurrency itself, is still in what will likely be the final stages of its shakedown cruise.
It’s easier to buy and hold with the development of blockchain technology, but the wild swings in value have prevented it from getting the widespread acceptance that’s necessary for Bitcoin to be the new gold.
As for the “old” gold, it will continue to be what it’s always been a great investment to mitigate financial risk during hard times, and a financial vehicle whose performance can be surprisingly excellent when those inevitable hard times hit.