Alexander Vasiliev He is the co-founder and CEO of the global payment network Mercuryo.
Since bitcoin’s popularity has started to increase, many people have come to call it “digital gold.”
And for good reasons.
While anonymous cryptocurrency creator Satoshi Nakamoto originally intended Bitcoin to operate as a peer-to-peer (P2P) electronic cash system, BTC also has an excellent store of value and safe haven asset characteristics.
Gold has a similar store of value real estate, with many conservative investors considering the precious metal to be one of the safest traditional investment vehicles on the market. There is also a common belief that a financial instrument is a good way to hedge against inflation.
However, many experts from the same group also criticize bitcoin for its lack of stability, often calling the cryptocurrency a bubble.
However, such statements about gold and bitcoin do not reflect the whole truth.
Bitcoin outperforms gold in terms of purchasing power
To see the whole picture, it is necessary to analyze gold and Bitcoin in terms of how the two financial instruments are performing in terms of inflation hedges, stores of value, and safe assets.
According to the Bureau of Labor Statistics’ Consumer Price Index (CPI)In the last five years, the US dollar has lost 11% of its purchasing power due to inflation.
This should come as no surprise since fiat currencies like the US dollar are inflationary due to a lack of constant supply and the constant money printing practices of central banks.
For an asset to be a suitable inflation hedge, it must maintain value growth at or above the rate of inflation to protect investors from a fall in the price of fiat currencies.
If we take a look at SPDR Gold Shares (GLD) Performance in the past five years From the chart above, we can see that the precious metal has maintained an increase in value of close to 54%, which is almost five times the rate of inflation of the US dollar.
For this reason, we can call the tool an inflation hedge. But is it better in this area than Bitcoin?
The simple answer is no. Chart above It clearly shows that in the past five years – even after the recent bitcoin price drop and the 2018 bear market – BTC has maintained its price appreciation by about 7500%, which is 138 and 680 times more than the inflation rate of gold and the US dollar, respectively.
More than just an inflation hedge
Over its 12-year history, Bitcoin has outperformed all other asset classes, increasing its purchasing power so dramatically that it shows that the cryptocurrency is more than a simple inflation hedge.
With the supply of BTC limited at 21 million coins, as well as the halving mechanism that cuts the supply of new coins roughly in half every four years, the digital asset features a contractionary monetary policy at the protocol level.
For this reason, there is no way to increase the supply of bitcoin in times of high demand for the cryptocurrency.
Meanwhile, due to the ever decreasing flow of new supply, BTC will see a long-term price hike even if demand remains at the same level as it is now.
This, combined with its robustness due to the highly flexible and immutable blockchain network, makes Bitcoin an excellent store of value.
While gold is also an extremely rare asset, like oil, its production can be increased or decreased based on current demand.
However, due to the vast deposits on Earth and the complexity of gold mining, the annual production rate of the precious metal is usually at about 2% of the total supply.
For this reason and due to the qualities of gold that make it impossible to destroy or synthesize assets from other materials, the precious metal is also a good store of value that has seen a long-term rise in prices.
But in this area, Bitcoin has a huge advantage over gold. While BTC can easily be used for P2P payments without any intermediaries, there is no system for purchasing products or services with a gold ingot.
In terms of being a safe asset — a financial instrument that can hold or increase its value when the general market is in turmoil — both bitcoin and gold keep their Relatively low correlation with other asset classes.
Thus, both tools have the characteristics of safe haven assets that set them apart from others in the field.
Bitcoin is on its way to becoming a viable alternative to gold
Bitcoin has the necessary qualities to be a viable alternative to gold and other precious metals in terms of an inflation hedge, a store of value, and a safe haven asset.
Despite the criticism, many companies and investment institutions chose 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, even with Elon Musk’s recent criticism of BTC’s high energy use. electric car maker I was born 23% of its profits for the first quarter of 2021 just by selling some bitcoin holdings.
With an excellent store of value properties, increased purchasing power, and high diversification, bitcoin has the potential to take the lead from gold and become the standard asset to fight inflation and hedge against general market turmoil.
This is another guest from before Alexander Vasiliev. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.