Bitcoin: digital gold or fool’s gold?
Iron pyrite is a mineral that looks like real gold. Many prospectors struck iron pyrite instead of real gold. Inexperienced miners who struck iron pyrite though they had hit the jackpot due to the similarities between iron pyrite and real gold. Unfortunately, iron pyrite is relatively worthless compared to real gold. Iron pyrite and other investments that seemed good, only to crash later, became known as fool’s gold.
Real gold on the other hand has long had the allure of wealth and riches. Humans are physically, emotionally and spiritually drawn to gold. This attraction, along the relative scarcity of gold has allowed it to maintain its value over centuries. With the advent of Bitcoin, many Bitcoin evangelists have claimed that Bitcoin is “digital gold” as it mimics the properties of gold without the disadvantage of storage costs. Does this claim hold true or is it all a massive marketing stunt?
Gold as an asset has a few characteristics that can be measured against Bitcoin to determine if this claim is true of not. I will look at the most salient ones: hedge against inflation, tangible, poor correlation with other asset classes, liquid and a safe haven asset.
Hedge against inflation
Scarce assets are often sought in times of inflation. Since Bitcoin has a fixed supply it fits the bill. Bitcoin often doesn’t move in tandem with inflation as it has also been extremely volatile. However, Bitcoin has clearly outperformed inflation since inception. While Bitcoin definitely has shown signs of being a hedge against inflation, it is still too early in the life cycle of Bitcoin to come to a definitive conclusion.
Tangible
You can physically feel gold. Bitcoin, you cannot physically feel. However, one of the benefits of tangible gold is that it is fully within your control, can be carried around with you and isn’t dependent on an external parties for maintenance. Physical Bitcoin wallets give Bitcoin these characteristics. It can be carried around with you and isn’t dependent on an external party for maintenance.
Poor correlation with other asset classes
Bitcoin has traditionally been poorly correlated with other asset classes. However, lately the correlation has been increasing. A publication by the IMF has shown that before April 2020, Bitcoin seldom had a correlation of more than 0.2 with the S&P 500. In fact, the correlation was often negative. After April 2020, the correlation was almost always positive and was often above 0.4. Similar trends can be found elsewhere. The correlation between the MSCI emerging markets index and Bitcoin had a 17-fold increase from the preceding years.
Liquid
Bitcoin is extremely liquid. It is extremely easy to transfer Bitcoin across the world cheaply and securely. Bitcoin is traded 24/7 using multiple exchanges across the world.
Safe haven asset
Solid arguments have been made for Bitcoin being a safe haven asset. However, post April 2020, these arguments have been increasingly challenged. The latest event to challenge the safe haven status of Bitcoin is the Ukraine Russia war.
While Bitcoin undeniably share many similarities with gold, it can not be considered digital gold. However, it has its own set of unique characteristics that may very well make it an indispensable asset in the years to come as it has outperformed most asset classes over the last ten years.
Allah Knows Best.
If you’d like to read more about crypto assets and blockchain you can read Developing trust in blockchains and Bitcoin: The new dinar. You can also read our articles on Gold as an investment.