Bitcoin is digital gold.
It’s a common refrain. People are quick to compare Bitcoin with gold for a number of reasons but there are some subtleties to the common narrative that could make Bitcoin a better investment than gold.
Let’s jump right in.
Inflation vs deflation
We’ve heard that Bitcoin is deflationary, like gold. What that means is that, because there is a fixed supply of the cryptocurrency the value should theoretically increase over time. That’s due to the scarcity that comes with using something that has a finite quantity as a currency.
But is gold actually deflationary? According to a blockchain expert working with ARK Investment Management, the global supply of gold has been sneakily going up by 1-2% every year for the last century.
So while gold isn’t as inflationary as the USD, which has seen a dollar lose 90% of its value in the last 100 years, if you are putting gold up against bitcoin then it’s hard to argue for anything other than the cryptocurrency. The supply of gold is going up slowly while the supply of bitcoin is algorithmically fixed.
A permissionless network
Bitcoin’s promise is one of decentralization and the creation of a permissionless network. In the ideal scenario, middlemen are cut out completely and people hold their own money rather than rely on banks and other institutions to do it for them. It’s a permissionless network, no one can freeze your funds or tell you that you’ve gone over your daily limit for the amount of money you want to wire somewhere.
With bitcoin, trust also increases as the number of users increase. The more people use bitcoin, the more robust the network becomes against attacks and the more attractive it becomes. These features don’t exist with gold. There’s no instant transfer of funds across the globe with gold. In fact it’s much harder and costly to transfer gold from one location to another. It’s also relatively easy to steal compared to funds in a blockchain ledger.
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The last point we will bring up is the hedging value of bitcoin which we believe to be superior to gold.
During the last recession, gold actually followed the S&P 500 to its lows in 2009, before rebounding spectacularly. Between 2007 and 2009 the S&P 500 lost roughly two-thirds of its value. In those two years gold went from around $600/oz to $1000/oz by the end of 2009. There was a fair amount of volatility but if you held on you would have nearly doubled your investment. If you timed it perfectly, gold would have acted as good hedge against the last recession.
If there is another recession you can bet that people are going to flock to bitcoin as an alternative form of hedging. That behavior, coupled with the fact that bitcoin is still relatively new, means that the cryptocurrency will be a fantastic hedge against an economic downturn. Gold has been around forever, but bitcoin is the new kid on the block.