People love to make comparisons between Bitcoin and gold, and the term ‘Digital Gold’ to refer to Bitcoin is being used more and more. While there are quite a few similarities, we want to address some of these comparisons and do some clarifying.
Gold and Bitcoin are pretty similar
Gold’s beautiful hues, malleable nature, inability to corrode and scarcity allured the earliest societies. In the modern world, all sorts of industries from aerospace to dentistry rely on the physical properties of gold to create well-designed products. But its economic value is derived from its scarcity.
Gold’s scarcity has made it a natural store of value even before government-backed currencies. And it’s still going strong. When compared to the majority of assets out there, if you had invested £100k in gold in 2006, you would have had £286k in 2016, greatly outperforming other traditional investment assets such as property, FTSE, bonds and savings.
Amidst the financial crisis of 2009, Bitcoin’s arrival shed light on the flaws of the current financial system and offered a solution to many of the issues that became uncovered. Both the mathematical beauty of Bitcoin and its functional capacity as a currency created unprecedented value for the currency. Bitcoin’s role in finance has been maturing since 2009, and it’s easy to see why a lot of people have made comparisons to gold:
Both are scarce.
The apparent natural scarcity of gold has maintained a steady circulating supply, keeping the price high and stable. Bitcoin’s encoded scarcity limits the number of coins ever to be produced to 21 million, which will be reached around 2140.
Both assets are authority-independent.
As gold’s value is derived from its natural occurrence, there is no central authority to influence the price or supply, an activity typically associated with government-issued currencies. Similarly, Bitcoin has been designed to be free from the grip of any centralised authorities; creating a system where state actors cannot manipulate its supply.
Both are seen as a good investment to safeguard one’s wealth from inflation or economic crises.
Gold’s authority-independent value has proven to be a protection mechanism against the liquidity crises of traditional currency markets. Bitcoin’s unique nature makes it free from traditional markets, a feature capable of bolstering the currency as a long-term hedge against inflation as the market reaches a broader adoption.
While there are some similarities in how Bitcoin and gold function as a store of value, Bitcoin has some natural advantages in the current digital economy. Let’s see how.
The winner = Bitcoin
With newfound technology, the circulating supply of gold is far more difficult to predict than that of Bitcoin. New technologies are unveiling opportunities for the discovery of gold both on Earth and in space. Gold is vulnerable to unknown spikes in the gold supply in the future. Who’s to say Elon Musk isn’t eyeing that NASA-identified asteroid of precious metals that contains enough gold to make everyone on Earth a billionaire. In total, it’s estimated that the asteroid’s various metals are worth $10,000 quadrillion (A number that would look like this: $10,000,000,000,000,000,000). If we carried it back to Earth, it would destroy commodity prices and likely cause the world’s economy to collapse.
Furthermore, gold’s physical inconvenience (weight, volume, etc.) removes its ability to functionally operate without a central authority. Gold can’t be divided into a reasonable size to buy a sandwich at Tesco’s, for example. You also probably wouldn’t want to drive a truck-worth of gold to buy that next house you’ve been eyeing. Bitcoin, however, can be stored, sent and received from within our app, which basically means having your own ‘digital gold vault’ at your fingertips, accessible anytime, anywhere.
Bitcoin has experienced a lively financial birth, punctuated by the rise of billionaires and start-ups. But, just as previous financial instruments had experienced growing pains on the road to stability, Bitcoin is now slowly maturing through initial volatility with increased stability. The latest Charles Swab report highlighted the new financial inclination towards investing in digital assets. Millennials are increasingly turning towards Bitcoin as an investment opportunity through the Grayscale Bitcoin Trust, GBTC, the first publicly quoted security based on digital currency in the US. Interest amongst institutions has also been soaring, with the number of open Bitcoin futures contracts growing 61% in October from a year earlier, according to CME Group. Some of these institutional investors include pension funds, endowments, insurance companies and mutual funds. What all of this shows is that we are experiencing a shift in perception, by both prominent financial institutions and the millennial generation, around the viability of Bitcoin as a meaningful investment; a sentiment that could further contribute to the stability of the market.
Ultimately, Bitcoin could potentially become THE investment option to safeguard one’s wealth. We predict digital assets will manifest as the best asset class for storing value and protecting your assets against regular currencies’ inflation, which will evolve into a driving force in the 21st-century financial world. At Mode, we are crafting products that will empower everyone to unleash the untapped value of the digital asset market.