Alexander Vasilyev is co-founder and CCO of the global payments network Mercuryo.
Since Bitcoin has become increasingly popular, many have called it “digital gold”.
And for good reasons.
While the anonymous creator of the cryptocurrency, Satoshi Nakamoto, originally envisioned Bitcoin as a peer-to-peer (P2P) electronic cash system, BTC also has excellent store of value and safe investment qualities.
Gold shares similar value retention characteristics, with many conservative investors viewing the precious metal as one of the safest traditional investment vehicles on the market. There is also a popular belief that the financial instrument is a good inflation hedge.
However, numerous experts from the same group also criticize Bitcoin for its lack of stability and often refer to the cryptocurrency as a bubble.
However, such statements about gold and bitcoin do not reflect the full truth.
Bitcoin beats gold in terms of purchasing power
To see the bigger picture, it is important to analyze gold and bitcoin in terms of how the two financial instruments perform in terms of inflation hedging, store of value, and safe investments.
According to the Bureau of Labor Statistics Consumer Price Index (CPI), the US dollar has lost 11% of its purchasing power over the past five years due to inflation.
This should come as no surprise as fiat currencies like the USD are inflationary due to the lack of fixed supply and the continuous money printing practices of central banks.
For an asset to be adequate protection against inflation, it must maintain growth in value at or above the rate of inflation to protect investors from the collapse in fiat currency prices.
If we look at the performance of the SPDR Gold Shares (GLD) over the past five years via the graph above, we can see that the precious metal has maintained an appreciation of almost 54%, which is almost five times the rate of inflation in the USD.
For this reason we can call the instrument an inflation hedge. But is it better than Bitcoin in this area?
The simple answer is no. The graph above clearly shows that over the past five years – even after the recent Bitcoin price drop and the 2018 bear market – BTC has maintained a price increase of nearly 7,500%, which is over 138 and 680 times higher than gold’s rate of inflation and USD respectively.
More than just inflation protection
In its twelve-year history, Bitcoin has outperformed all other asset classes and increased its purchasing power so significantly that it becomes clear that the cryptocurrency is more than just a simple inflation protection.
Due to BTC’s limited supply of 21 million coins, as well as the halving mechanism that halves the supply of new coins roughly every four years, the digital asset has a deflationary monetary policy that is hard-coded at the protocol level.
Because of this, there is no way to increase the bitcoin supply during times when the demand for the cryptocurrency is higher.
At the same time, BTC will experience a long-term price increase due to the continuously decreasing new supply, even if the demand remains at the current level.
This, in addition to its durability due to its highly resilient and immutable blockchain network, makes Bitcoin an excellent store of value.
While gold is also a very scarce commodity, like oil, its production can be increased or decreased based on current demand.
However, due to the huge inventories on earth and the complexity of gold mining, the annual production rate of the precious metal is typically around 2% of total supply.
For this reason, and because of the properties of gold that make it impossible to destroy or synthesize the asset from other materials, the precious metal is also a good store of value that has seen long-term appreciation in value.
But in this area, Bitcoin has a big advantage over gold. While BTC can be easily used for P2P payments without a middleman, there is no system for purchasing products or services with a gold bar.
As a safe haven – a financial instrument that can hold or increase in value when the general market is in turmoil – both Bitcoin and gold have relatively little correlation with other asset classes.
Both instruments therefore have safe haven asset qualities that distinguish them from others in this area.
Bitcoin is on the way to becoming a viable alternative to gold
Bitcoin has the necessary properties to be a viable alternative to gold and other precious metals in terms of inflation protection, storage of value and safe investment.
Despite the criticism, many companies and institutional investors have chosen to invest in Bitcoin to protect their assets during the pandemic and the economic fallout that followed.
Tesla is an excellent case study for this, despite Elon Musk’s recent criticism of BTC’s high energy consumption. The electric car maker made 23% of its profit in the first quarter of 2021 from just selling part of its Bitcoin holdings.
And with excellent store-of-value properties, increased purchasing power, and high versatility, Bitcoin has the potential to take the lead in gold and become the standard asset for fighting inflation and hedge against general market turmoil.
This is a guest post by Alexander Vasilyev. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. Bitcoin magazine.