Bitcoin — The New Digital Gold?
Bitcoin was originally envisaged as “electronic cash” or e-money — the idea being that this digital money could be used for everyday online transactions instead of traditional cash or credit cards. 11 years on since the publication of the Bitcoin white paper, that vision has not yet come to pass. Consumer transactions haven’t been the main driver of Bitcoin’s growth to date. Instead, Bitcoin has become more popular as an investment vehicle akin to a form of ‘digital gold’.
How does Bitcoin resemble digital gold?
In his book, entitled Digital Gold: The Untold Story of Bitcoin, the journalist Nathanial Popper describes how “From the beginning, Satoshi [Nakamoto] envisioned a digital analog to old-fashioned gold: a new kind of universal money that could be owned by everyone and spent everywhere. Like gold, these new coins were worth only what someone was willing to pay for them, initially nothing. But the system was set up so that, like gold, Bitcoins would always be scarce — only 21 million of them would ever be released — and hard to counterfeit. As with gold, it required work to release new ones from their source, computational work in the case of Bitcoins. Bitcoin also held certain obvious advantages over gold as a new place to store value. It didn’t take a ship to move Bitcoins from London to New York — it just took a private digital key and the click of a button”.
Calling Bitcoin ‘digital gold’ may be a little simplistic but Bitcoin does share some of the characteristics of gold mentioned above by Popper — it can be used as a store of value and it requires ‘mining’ (though, in the case of Bitcoin, this mining equates to solving mathematical puzzles of increasing complexity as opposed to extracting precious metals from the ground).
Is Bitcoin better even than digital gold?
When Bitcoin first launched, some of its heaviest critics were the so-called ‘gold bugs’ — investors or analysts who are enthusiastic about gold as an investment and expect it to significantly increase in value. So it was interesting to see, earlier this year, that the digital currency investing firm Grayscale Investments had launched an ad campaign designed to encourage potential investors to ‘Drop Gold’ in favor of cryptocurrency or cryptocurrency-based products. The campaign argued that, while Bitcoin and gold do share some common qualities, Bitcoin is, in fact, superior even to a digital version of gold.
Michael Sonnenshein, managing director of Grayscale, explained to Bitcoin Magazine that “Gold is a traditional investment in a physical world but today’s world is digital and demands a digital investment. We agree that Bitcoin and gold share a lot of the same properties; Bitcoin and gold are both scarce assets, they are both decentralized assets,” Sonnenshein said. “But Bitcoin possesses a superior composition of ‘good money’ qualities made for a digital global economy. For example, the fact that you can send Bitcoin electronically or that you can access your holdings from anywhere in the world are just a few of the traits that make Bitcoin the superior store of value.”
Indeed, unlike gold, Bitcoin does not require any physical storage facilities, it can be sent instantly — peer to peer, with no need for a middleman or associated fees — and it cannot be counterfeited.
So, should investors back gold or Bitcoin? Historically, gold has tended to perform well when bull markets correct themselves. Although its value may not rise, it tends to remain stable while other assets’ value declines. This provides investors with some protection for the value of their assets — a form of a safe haven. When more investors see this and begin to sell their stocks and invest in gold, the price may then also rise accordingly providing the loyal gold investors with gains when everyone else is losing money.
Can the ‘new kid on the block’ really compete with gold’s historical dominance?
In the decade or so since Satoshi Nakamoto first outlined the concept of Bitcoin, the cryptocurrency’s ability to settle value across borders has been unprecedented in the history of money. Every day, billions of dollars’ worth of value transfer are now made via the Bitcoin blockchain.
Yet Bitcoin is still perhaps less liquid (due to limits on how much and how quickly users can exchange Bitcoin for fiat currencies) and much more volatile in price than gold. Questions over illicit use of the cryptocurrency, regulatory uncertainty about where and how it can be used and question marks over its utility all make it still more speculative in some respects than physical gold which has clear value and uses in the physical world.
Gold still has its place as a reliable store of value but it seems that a portfolio without a small portion devoted to ‘digital gold’ could be less effective at providing long-term insurance against changing market conditions. There is, of course, no easy way to predict what may happen to Bitcoin over the next decade but, based on the past decade’s growth, the rise of the ‘Bitcoin bugs’ looks set to continue.
CoinMENA, incorporated in Bahrain, is one of the MENA region’s leading digital assets and blockchain companies, providing a safe and easy way to buy and sell digital assets. For more information, visit CoinMENA.com
