Is Bitcoin Digital Gold?

As Bitcoin gained popularity and established its position in the financial apparatus over the last decade, many are suggesting that it has taken Gold’s role as a store of value and wealth preservation asset. Bitcoiners are making the case that Gold has lost its shine and are going as far as saying that Bitcoin is digital Gold.

This has culminated into Bitcoin maximalists taking shots at the Gold bugs and vice versa. It has become one of the most popular debates among the finance community and it doesn’t seem like it's going away anytime soon.

So what's all the arguing about? Why can't Gold and Bitcoin coexist?

Well, Bitcoin maximalists and Gold bugs actually agree on many things. They both see the world in a similar way. Both of them understand that the current projection of the world economy is unsustainable. They both believe that the US Dollar’s supremacy will come to an end and this will end in hyperinflation. What they don't agree on is the vehicle to utilize to protect against this risk of ruin. Crypto enthusiasts believe it's Bitcoin and precious metals advocates believe it's Gold.

Gold has been known as a hedge against inflation for thousands of years. That means when currency starts to lose its value, people turn to assets like Gold to protect their purchasing power. For example, $100 in the year 1922 can buy you a lot of things. You can buy some furniture, clothes, go out for a nice dinner and still have money left over for a full tank of gas. Today, that same $100 could only buy you a full tank of gas.

But let's say you had $100 worth of Gold in 1922. An ounce of Gold in 1922 was $20 which means you would own 5 ounces of Gold. That same ounce of Gold is now worth $2,000 so that $100 would be worth $10,000 today. What can you buy with that kind of money today? Well, you can buy some furniture, clothes, go out for a nice dinner and still have money left over for a full tank of gas.

So Gold has proven itself over the course of history as a great inflation hedge and wealth preservation asset. But Bitcoiners believe that BTC can do a better job as a hedge against inflation and can be a better wealth preservation tool than Gold. They have taken this position now because Bitcoin’s original quest to become the new global currency has failed. It cannot and will never be a currency because it is too volatile. One of the main requirements of a sound currency is stability and Bitcoin doesn't have that. Even the most faithful devotes of Bitcoin cannot deny that a currency or store of value with price moves of 20% in a single trading day is hardly justifying its way to such designations.

So the new title Bitcoin maximalists have given for BTC is “Digital Gold.” They say that when the economy collapses, you should own Bitcoin because it is the best way to protect yourself from ruin. As I said earlier, for thousands of years, this has been the role of Gold. So now Bitcoiners are attacking Gold and are trying to dethrone it as the ultimate hedge against inflation and wealth preservation tool. This is what has sparked this entire debate.

The ultimate wealth preservation asset must be independent, permanent and scarce.

Gold is independent because it is not tied to any other financial asset. It holds its own ground and is not correlated with anything else. Bitcoin on the other hand is far from independent. Without the internet you cannot access your Bitcoin, it is highly dependent on computers. Bitcoin is also heavily correlated to risk assets. Rather than hedge or protect portfolios when markets tank, Bitcoin drops like any other risk asset only faster with each and every market moment of “uh-oh” and “risk-off.”

Where Gold is superior to any other financial asset is its permanence. Gold has been money for thousands of years and is the only money which has survived in its original form. Anyone else trying to argue that Bitcoin can assume the mantle of Gold after 12 years of existence is premature by a few thousand years.

The one thing Gold and Bitcoin have in common is that they are both scarce. Gold is clearly scarce, there is a limited supply that only grows at a very small rate every year. Bitcoin is also scarce as there can only be a maximum of 21 million coins in circulation once they are all mined. And until someone figures out how to break the Bitcoin blockchain, this fact will remain true.

Although, some people see beyond this silly argument of Gold vs Bitcoin. It doesn't make sense to compare the two for the simple reason that they are entirely separate investment classes. It is a comparison of apples to oranges, not oranges to tangerines.

At the simplest level, Bitcoin is a speculation investment, Gold is a preservation asset. They both can have a place in your portfolio and can coexist together. In fact, many investors own Bitcoin to speculate for wealth while simultaneously holding Gold to preserve it. The people stuck on either team are ignoring the fact that these are two investments playing on entirely different playing fields.

For the last decade or so, Bitcoin has made many rich and for the next decade or so, could make others even richer. That's a speculative bet. Trade BTC as you will, but I personally don't believe it will be a currency, store of value or the “new digital Gold.” Again, Bitcoin can go much higher and it can make you rich (or broke). The stories of wealth made on the Bitcoin wave are impressive.

I like to think of Bitcoin as another tech stock. Both Bitcoin and the Nasdaq peaked in early November of last year and have been on a decline ever since. The sell-off has worsened due to the Russia-Ukraine war and if Bitcoin was really a safe haven, store of value, or digital Gold, it would be going up during this time. But it hasn’t. It has been correlating with tech stocks and other risk assets.

What has been going up during these times of geopolitical tensions and uncertainty? Gold. Is it going up 5 or 10% in a day like Bitcoin casually does? No, but that's not what Gold does. For the last 5,000 years and for many more to come, Gold will do what it always does: preserve your wealth when other assets and currencies cant.

There will always be people comparing Bitcoin’s performance to Gold over the last five or ten years and state that because Bitcoin has gone up more than 100 fold the amount Gold has risen, that means Bitcoin is the better store of value. This argument is sheer nonsense. Ethereum has risen more than Bitcoin over the last five years, does that mean it is a better store of value than Bitcoin now? Dogecoin outperformed Bitcoin last year, does that mean it is a better store of value than Bitcoin now?

Again, Gold and Bitcoin are two very different things. When you buy Bitcoin, you are taking on the risk of it falling by 80%, as it has done in the past. Just ask the people that bought it when it was at $19,000 in December of 2017. It collapsed by more than 50% in just a matter of months. This is the type of risk you take on when you invest in something like Bitcoin. That is why it is called a risk asset. Gold on the other hand is one of the safest and least riskiest investments to make. It has never dropped by 80% and it has thousands of years of historical data behind it.

Of course, with great risk comes great reward. So if you do want to make a quick buck and don't care about the risks involved, maybe you can speculate on Bitcoin. But if you are risk-averse and want to preserve your capital, maybe you can invest in Gold. It all depends on you're investing goals. A lot of people decide to hold Gold and Bitcoin because they see the value in both. The fact is, Bitcoin is not the new digital Gold. Bitcoin is fools Gold.