Since its launch in 2009, Bitcoin has continued to grow, and its value tends to increase, gaining much attention from investors. As of 2021, its market capitalization has reached US$1 trillion, causing many investors to be interested in including it in their portfolios.
Traditionally, investors and traders store their wealth in property, stocks, or gold. Gold is generally used as a safe haven against the fluctuating prices of other assets affected by inflation. But lately, Bitcoin has been referred to as digital gold that functions similarly to traditional gold. With its limited quantity, the price of Bitcoin will theoretically continue to increase over time and with high market demand. Its value, which is not affected by inflation, also makes it an asset with the same hedging properties as gold. To better understand how Bitcoin differs from gold, read this article!
What is a Store of Value?
A store of value is an asset that can be stored and retrieved without losing value over time. By this definition, we can say that fiat money is a poor store of value as its value is constantly changing. Cash is a convenient means of buying and selling daily and storing liquidity in the short term, but it does not keep its value well over the long term.
Recently, there has been hyperinflation in the financial systems of many countries worldwide. Hyperinflation occurs when money loses value quickly, by about 50% or more per month. It is also followed by rising prices of goods and services and a corresponding reduction in purchasing power. Although hyperinflation is rare in developing countries, inflation constantly occurs, so the value of fiat money continues to go up and down. Governments around the world use inflation to control the amount of money in the market. Governments also deliberately reduce the value of their fiat money each year to incentivise people to make purchases or investments in the hope that economic development will occur and create new jobs.
The above shows that fiat money loses value over time, so using other assets as a store of value is the right way to secure your wealth. That’s why people invest in stocks, real estate, gold, and other assets that can retain their value over time.
An asset not affected by market movements is essential if you are looking for a hedge. This is where Bitcoin and gold come into debatable consideration. For a long time, gold has been a hedge used around the world. Investors usually switch their assets to Bitcoin or gold when the market is experiencing turbulence because these two assets are not affected by such events. In fact, the value of both assets continues to grow regardless of market conditions. When assessing how Bitcoin and gold compare, investors consider them safe havens due to their stability in value. While investors may not see rapid gains, they believe these two assets will protect their wealth from declining in value in the long run.
Why is Bitcoin a hedge?
Unlike gold, which is used to make jewellery, coins, and electronic components, Bitcoin has no such industrial uses. However, it can be used as a medium of exchange for goods and services. Bitcoin can be a hedge because it is both durable and finite. The total number of Bitcoins is limited to 21 million pieces; none will be added after that. With this limitation and the increasing market demand, the value of Bitcoin will continue to rise in the long run.
Bitcoin is also a decentralized digital asset that operates without the control of central banks and governments, relying on a global network of nodes or miners to make the system work. This also gives Bitcoin users a bit of privacy and increases its security. The ideal hedge should function as a medium of exchange for goods and services at any time. Bitcoin is fungible because it has fungibility of value, is portable, easy to share, and has been adopted by many markets.
Bitcoin vs Gold
It isn’t easy to distinguish between Bitcoin and Gold because they have a lot in common. Both assets are good hedges when markets are facing turbulence. But here are some factors that we can compare between Bitcoin and Gold to help you understand how they differ.
Scarcity is a key characteristic of a good hedge when comparing Bitcoin and gold. When an asset has an unlimited amount, it is easy for the available amount to increase in the market over time. But as a result, the asset’s value will plummet, making it a poor hedge. On the other hand, when the quantity is limited, the high market demand will cause the value of the asset to increase.
Scarcity is one of the advantages of gold, making it a good hedge. It is finite, expensive, and requires considerable resources to obtain through mining. With its limited nature, increasing the amount of gold in the market is not easy. So when the market demand for gold increases, it is difficult to meet it. Compared to other natural materials, such as silver and copper, which are more abundant and easy to mine, gold tends to be more limited and challenging to obtain, making it more highly valued than these materials.
But if gold is finite, do you know of another asset more finite than it? The answer is Bitcoin. With only 21 million pieces, this asset will no longer be mined by 2140. Although people have been mining gold for a long time, the earth still provides this asset to be mined. For the scarcity factor, its limited amount clearly makes Bitcoin a better hedge than gold.
Fungibility is the quality of being interchangeable and uniform, another factor that makes an asset a good hedge. This quality facilitates the exchange of goods and services because fungibility means equivalent units have the same value and can be exchanged across different markets and locations. For example, a Mercedes car and a Jeep are both means of transportation. But they are not directly interchangeable as each vehicle has different and unique features that give them value. As for gold’s overall fungibility, an ounce of pure gold has the same value as an ounce of pure gold in any country and any market.
However, gold, in some cases, does not have fungible value. Gold with impurities does not have the same value as pure gold. Bitcoin, on the other hand, always has value equivalence. One Bitcoin always has the same value as one Bitcoin, no matter where it is. This adds one more factor to why Bitcoin is a better hedge than gold: its fungibility.
A hedge must be easily divisible into smaller sizes to be used as a medium of exchange for goods and services of equal value. In this case, gold fails to be a good hedge because its high value makes small amounts of gold still expensive. It is thus difficult to make it an asset of lesser value even with a small size. This is where paper gold holdings are essential, making gold more easily divisible into smaller sizes. However, this does not fully represent gold as an asset, so the division problem remains.
Bitcoin, on the other hand, has never had the same problem. Bitcoin can be divided into 100,000,000 smaller fractions called “satoshis”. This makes Bitcoin easy to use and exchange in smaller or larger sizes.
One of the other things to consider when comparing gold and Bitcoin is portability. Gold is a heavy material, not easily transported. Shipping gold in large amounts is expensive, making it difficult to use as a medium of exchange for long-distance transactions. This makes inter-regional transactions impractical, especially internationally.
Bitcoin does not have this problem. As a digital asset, any amount can be stored and carried anywhere in hardware or online. It can be accessed wherever you are as long as there is access to the internet. Sending Bitcoin for transactions is fast and inexpensive compared to gold. You can move any amount of Bitcoin easily and securely within minutes. This makes Bitcoin another winner as a hedging tool.
Adaptation in Society
Society must accept the asset as a transaction tool before it is categorized as a good hedge. This is important because people tend to judge things by their adaptation to society. Gold has been a valued medium of exchange for a long time and is therefore considered a good hedge overall. In addition, it is also used in forms such as jewellery, coins, and more.
In this case, gold tends to be more valuable as a hedge when compared to Bitcoin. This is because Bitcoin is still young compared to gold, so its societal adaptation has yet to be significant. Many investors see Bitcoin as a unique asset that needs time to be more widely adopted.
The world’s banks and governments have yet to accept the idea of a decentralized currency fully. This has led to regulatory issues where not all countries accept Bitcoin as an investment asset or a medium of exchange for goods and services. In comparison, gold is legally accepted in any country, making it superior to Bitcoin.
With governments continuing to print money and reduce the value of fiat currency, gold and Bitcoin are good wealth protectors to avoid the effects of inflation. Gold has been used for centuries and is still a good hedge. But Bitcoin, while not as long-lived as gold, is an asset you can consider to preserve the value of your wealth. Many factors make Bitcoin superior to gold, so consider choosing it as a protective asset.