Why Some View Bitcoin as a Store of Value Similar to Gold
Over the past decade, Bitcoin has emerged as a disruptive force in the financial world.
Originally conceived as a peer-to-peer electronic cash system, Bitcoin has since evolved into something much more profound: a digital store of value, often compared to gold.
The term “digital gold” has become synonymous with Bitcoin, reflecting its perceived role as a safe haven asset in times of economic uncertainty.
But what exactly makes Bitcoin comparable to gold, and why do some investors and analysts believe it can serve as a store of value?
This chapter delves into the reasons behind Bitcoin’s comparison to gold, supported by data, real-world examples, and insights up to 2024.
Contents
The Store of Value Concept
Gold and Bitcoin
To understand why Bitcoin is often likened to gold, it’s essential first to grasp the concept of a store of value.
A store of value is an asset that retains its worth over time, allowing its holder to preserve wealth without suffering significant depreciation.
Historically, gold has been the quintessential store of value, prized for its rarity, durability, and universal acceptance.
Gold has withstood the test of time, maintaining its value through wars, economic crises, and the rise and fall of empires.
Bitcoin, on the other hand, is a relatively new asset, introduced in 2009 by an anonymous individual or group known as Satoshi Nakamoto.
Despite its short history, Bitcoin has garnered a reputation as “digital gold” due to its unique characteristics that mirror those of physical gold.
Scarcity and Supply Cap
One of the most compelling arguments for Bitcoin as a store of value is its inherent scarcity.
Like gold, Bitcoin has a limited supply.
The total number of Bitcoins that will ever exist is capped at 21 million, a limit hardcoded into its underlying protocol.
This finite supply contrasts sharply with fiat currencies, which central banks can print at will, often leading to inflation and a decrease in purchasing power.
As of 2024, approximately 19.7 million Bitcoins have been mined, with the remaining 1.3 million expected to be mined over the next century.
The gradual reduction in Bitcoin’s issuance, known as “halving,” occurs every four years and further contributes to its scarcity.
Each halving event cuts the reward for mining new blocks in half, reducing the rate at which new Bitcoins enter circulation.
The most recent halving, in 2024, reduced the block reward from 6.25 BTC to 3.125 BTC, highlighting the asset’s deflationary nature.
Gold, too, is scarce, with new supplies being difficult and costly to extract.
The total amount of gold ever mined is estimated at around 197,576 metric tons, and while gold continues to be mined, the rate of new discoveries has slowed significantly.
This scarcity has helped gold maintain its value over millennia, and Bitcoin’s fixed supply positions it as a potential digital counterpart.
Bitcoin’s Role in an Inflationary World
Inflation erodes the value of fiat currencies by increasing the cost of goods and services over time.
As inflation rises, the purchasing power of money decreases, leading individuals and institutions to seek assets that can preserve value.
Gold has traditionally served this purpose, providing a hedge against inflation for centuries.
In recent years, Bitcoin has increasingly been viewed as a modern alternative.
Bitcoin as an Inflation Hedge
The COVID-19 pandemic and the resulting economic fallout in 2020 led to unprecedented levels of monetary stimulus by central banks worldwide.
In the United States, the Federal Reserve’s balance sheet ballooned to over $6.5 trillion as it injected liquidity into the economy to stave off a deep recession.
This massive influx of money raised concerns about future inflation, prompting investors to look for assets that could protect their wealth.
Bitcoin, with its fixed supply and decentralized nature, emerged as an attractive option for those seeking to hedge against inflation.
Throughout 2020 and 2021, Bitcoin’s price surged, driven in part by growing fears of inflation.
By April 2021, Bitcoin reached an all-time high of nearly $60,000, with analysts and investors citing its potential as a store of value in an inflationary environment.
Gold, meanwhile, continued to hold its own, with prices reaching an all-time high of over $2,070 per ounce in August 2020.
However, the surge in Bitcoin’s price and its increasing adoption by institutional investors began to shift the narrative.
Some investors started to view Bitcoin as a superior alternative to gold, given its ease of transfer, divisibility, and growing acceptance in the digital age.
Institutional Adoption and the Digital Gold Narrative
The notion of Bitcoin as digital gold gained further traction as institutional investors began to allocate a portion of their portfolios to the cryptocurrency.
In 2020, MicroStrategy, a publicly traded business intelligence firm, made headlines by purchasing $425 million worth of Bitcoin as a treasury reserve asset.
The company’s CEO, Michael Saylor, cited Bitcoin’s scarcity and potential as a store of value as key reasons for the investment.
Following MicroStrategy’s lead, other institutions, including Tesla and Square, also added Bitcoin to their balance sheets.
In February 2021, Tesla announced it had purchased $1.5 billion worth of Bitcoin, further legitimizing the digital gold narrative.
Additionally, hedge funds and asset managers, such as Paul Tudor Jones and Guggenheim Partners, publicly endorsed Bitcoin as a potential hedge against inflation.
By 2024, Bitcoin had firmly established itself as a component of institutional investment strategies, with several large asset managers offering Bitcoin-related products, such as exchange-traded funds (ETFs) and futures.
This growing institutional adoption has reinforced the perception of Bitcoin as a store of value, akin to digital gold.
Volatility
The Double-Edged Sword of Bitcoin as Digital Gold
While Bitcoin shares many characteristics with gold, it also has significant differences, particularly in terms of volatility.
Bitcoin’s price has been notoriously volatile since its inception, with wild swings in value that can occur within days or even hours. This volatility has led some critics to question its suitability as a store of value.
Historical Price Fluctuations
Bitcoin’s price history is marked by several dramatic bull and bear markets.
In 2017, Bitcoin experienced a meteoric rise from under $1,000 in January to nearly $14,000 by December, driven by speculative mania and increasing public awareness.
However, the euphoria was short-lived, as Bitcoin’s price plummeted by over 80% in 2018, falling to around $3,000 by the end of the year.
The cycle repeated in 2020 and 2021, with Bitcoin reaching new all-time highs, only to experience sharp corrections in subsequent months.
For instance, after hitting nearly $65,000 in April 2021, Bitcoin’s price dropped by more than 50% to around $30,000 in July 2021.
These fluctuations highlight the inherent risk and uncertainty associated with Bitcoin, contrasting with gold’s relatively stable price movements.
The Impact of Volatility on Bitcoin’s Store of Value Status
Bitcoin’s volatility poses a challenge to its status as a store of value.
Unlike gold, which has a long history of price stability and gradual appreciation, Bitcoin’s value can change rapidly, making it difficult for investors to predict its future performance.
This volatility can be attributed to several factors, including market speculation, regulatory developments, and macroeconomic events.
Despite this volatility, some proponents argue that Bitcoin’s long-term trajectory has been overwhelmingly positive.
Since its inception, Bitcoin has appreciated by millions of percentage points, outperforming nearly every other asset class over the same period.
Proponents believe that as Bitcoin matures and gains wider adoption, its volatility will decrease, making it a more reliable store of value.
Bitcoin’s Role in a Diversified Portfolio
For many investors, Bitcoin’s potential as digital gold lies in its role as a diversifier in an investment portfolio.
Diversification involves spreading investments across different assets to reduce risk and improve overall returns.
Given Bitcoin’s unique properties and lack of correlation with traditional assets, it can serve as an effective diversifier.
Low Correlation with Traditional Assets
One of the key reasons investors are drawn to Bitcoin is its low correlation with traditional assets, such as stocks, bonds, and gold.
During periods of market turmoil, Bitcoin’s price movements have often diverged from those of other assets, providing a hedge against broader market downturns.
For example, during the COVID-19 pandemic in 2020, global stock markets experienced sharp declines as investors reacted to the economic uncertainty.
While Bitcoin initially fell in March 2020, it quickly rebounded and outperformed most other asset classes for the remainder of the year.
This low correlation has made Bitcoin an attractive option for investors seeking to diversify their portfolios and reduce risk.
Portfolio Allocation Strategies
As Bitcoin has gained acceptance as a store of value, financial advisors and asset managers have increasingly recommended including a small allocation to Bitcoin in diversified portfolios.
Studies have shown that even a modest allocation of 1-5% to Bitcoin can improve portfolio performance, particularly during periods of inflation or market volatility.
By 2024, several major investment firms, including Fidelity and BlackRock, had begun offering Bitcoin-related investment products, such as ETFs and managed funds, making it easier for retail and institutional investors to gain exposure to the cryptocurrency.
These products have helped to further cement Bitcoin’s role as a component of diversified investment strategies, akin to gold.
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