Bitcoin is frequently referred to as “digital gold” due to its ability to retain its value in the same way that physical gold does. Is this true? Let’s find out!
There is no consensus yet on whether bitcoin is a defensive or a speculative asset. Only a few investors and organizations invest capital in the first cryptocurrency to protect against inflation.
Studies of the correlation of bitcoin and various asset classes show that it behaves differently in different market situations.
Satoshi Nakamoto envisioned bitcoin as a full-fledged payment system with none of the drawbacks of fiat money. The primary one is inflation, which is defined as the gradual loss of real value as expressed in purchasing power.
To counter this, the following properties are embedded in the architecture of bitcoin:
- The issue is limited to 21 million BTC. Miners will mine the last coin in the fall of 2140.
- The volume of new coin production is decreasing. The rewards for mining bitcoin are halved approximately every four years as a result of a programmed event known as halving.
Gold has similar properties. Its reserves are limited because it is a natural metal. And, while the volume of this resource is increasing, it is not keeping up with the increase in demand, and new deposits are becoming increasingly scarce.
Finally, as with bitcoin, humanity has voluntarily recognized gold as a valuable asset with monetary value.
The way bitcoin and gold are used is a key similarity. For many years, gold has served as both a means of preserving value and a means of payment. Their worth was determined by the contents.
The so-called “gold standard” was established in developed-country at the end of the nineteenth century. Gold served as the universal equivalent of value, and the state provided the value of fiat money with its gold reserves. The state that issued the currency guaranteed the ability to exchange banknotes for a certain amount of gold.
In 1944, Western countries concluded the Bretton Woods Agreement, according to which national currencies had a fixed exchange rate for the dollar, which was pegged to the price of gold. A troy ounce of the precious metal was valued at $35. Although it replaced the “gold standard,” the new monetary system was still based on the price of gold.
The United States abolished the fixed exchange rate of the dollar to gold in 1971, rendering the Bretton Woods Agreement obsolete. Since then, fiat money rates have been determined by the open market’s supply and demand. Simultaneously, the dollar’s constant, albeit low, inflation has become routine.
However, from the 1980s to 2022, its annual value did not exceed 2%. Because the dollar is money, it is also the world’s reserve currency, making it a popular safe-haven asset.
Gold was no longer used for payment, but it retained its value. The reason for this is the ability to preserve value: the economic incentive works against the sale.
The primary function of gold as an investment asset is its ability to maintain and increase in value during times of crisis. When the economy is in a long period of recession, investors sell high-risk assets such as stocks and buy means of preserving value, particularly gold.
The price of gold began to rise in 1972 and peaked in 1979. However, over the next 30 years, the precious metal traded at roughly the same level, adding, then losing value..
Only in 2007 did gold reach its 1979 peak value (approximately $680 per troy ounce). Following that, the global financial crisis erupted, and by 2011the metal’s price had nearly tripled, surpassing $1800. The asset lost value over the next eight years. It started to rise in mid-2019. The coronavirus pandemic fueled the quotes, and by August 2020they had nearly reached $2000.
According to the evidence left by Satoshi Nakamoto himself, bitcoin was created in response to the crisis of 2007, which the United States “extinguished” with the help of a large-scale additional issue of the dollar. Since the launch of the main cryptocurrency network, its price has consistently increased from year to year. But for shorter periods of time, bitcoin is a volatile asset. This makes it related to high-risk assets.
Several researchers have discovered a link between bitcoin and the stock market. Arcane Research reported in April 2022 That the movement of the first cryptocurrency was most similar to the shares of technology companies, which are considered a riskier segment of the stock market.
A few months ago, Goldman Sachs analysts warned that the price of bitcoin is affected by macroeconomic factors and that its value may fall as the Fed tightens policy. This is exactly what happened later.
According to Bank of America, since 2021, the price of the first cryptocurrency correlates with the stock market. As an example, the bank’s researchers cited the correlation with key stock indexes — the S&P 500 and Nasdaq 100. Therefore, they think that bitcoin is not a secure asset.
There are also some facts that speak in favor of bitcoin as a means of preserving value.
First, well-known investors talked about the protective properties of bitcoin. The thesis of “digital gold” in 2021 was supported by the American financier Ray Dalioalthough he later noted that the first cryptocurrency loses to gold.
In April 2022the former head of the Bitmap exchange, Arthur Hayesexpressed the opinion that bitcoin would eventually become a protective asset due to the Fed’s policy and the depreciation of the dollar.
Second, depending on the market situation, bitcoin’s correlation with various asset classes can change. Block researcher Larry Cermak believes that the value of the first cryptocurrency will begin to correlate in behavior with risky assets during the market’s fall in 2020.
Another “for” argument is the use of bitcoin as digital gold. Despite its high volatility, a number of large corporations have already invested in the first cryptocurrency. Tesla, Core Scientific, and Square are among those listed on the Bitcoin Treasury Bonds website.
Michael Saylor, CEO of MicroStrategy, is a major bitcoin supporter; his company owns nearly 130,000 BTC.
Furthermore, bitcoin is already used in government reserves. El Salvador’s government has been buying bitcoin into its treasury since 2021.
JPMorgan believes that bitcoin has the potential to become digital gold due to its widespread adoption among institutional investors, but achieving this goal limits the first cryptocurrency’s reliance on inflation.
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