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What makes Bitcoin “digital gold”?

Bitcoin is often touted as a digital form of gold. Here's a look into how it compares to the real stuff.

31 May 2022by Mohammad Musharraf

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Disclaimer: The following is for informational purposes only and should not be construed as financial advice. 

Gold has dominated investment markets for centuries. But over the past decade, Bitcoin's rising popularity has demonstrated how a blockchain-based distributed network can store value intrinsically while enabling secure, borderless transactions. 

The world's first cryptocurrency quickly established itself as “digital gold”, and although it’s being tested in today’s bear market, investors have been adopting Bitcoin as a hedge against inflation, recession, and socio-economic disasters. 

But what is it exactly that makes Bitcoin digital gold, and how does this leading cryptocurrency compare to tangible, real-world gold that glitters and glistens?

This article examines the similarities and differences between Bitcoin and gold using metrics such as regulation, utility, liquidity, and volatility.

Before diving into the details, though, it's necessary to understand how each of these commodities fare as financial instruments.

Bitcoin in brief

Introduced in 2009, Bitcoin is a digital-native crypto asset and the largest by market capitalization. In less than a decade, Bitcoin established itself as an excellent store of value and a unit of exchange. 

Bitcoin was created by a person or a team of people under the pseudonym Satoshi Nakomoto, who described the new technology as an electronic peer-to-peer cash system. This gave rise to the crypto industry: a new era of finance and investing in which people could finally take control of their assets and break free from the dominance of central banks.

A picture of Dorian Satoshi Nakamoto.
Japanese-American Dorian Satoshi Nakamoto, who some have falsely claimed is Bitcoin's founder (Image source)

Unlike regular fiat currencies, Bitcoin is created, stored, and traded on a distributed ledger called the blockchain. At its core, a blockchain is a decentralized database spread across a network of nodes around the world. 

This network is immutable, meaning that whenever a transaction takes place on the blockchain, this new information along with the information in the previous block is merged to form a fixed chain. The network has a set of participants called miners who verify these transactions. Whenever a transaction is successfully verified by a miner, a Bitcoin is created and rewarded to that miner. The miner is then free to sell, trade, or simply hold their coin. 

No single person, company, organization, or country can control the Bitcoin network and anyone can become a part of it. This means that Bitcoin, as a product of this network, also cannot be controlled by central banks or other government authorities. 

Bitcoin has a maximum total supply of 21 million coins, out of which 19 million are currently in circulation. The production of new coins also halves approximately every four years, with total production estimated to finish in 2140. 

A graph showing Bitcoin’s production schedule.
The halving of new Bitcoins occurs roughly every four years (Image source)

The inherent value of Bitcoin is thus a function of this scarcity, along with other things such as utility and acceptability. 

Bitcoin’s value increases in proportion to demand. As of writing, its price is at $31,000, less than half its all-time high of $68,789.

Gold in brief

With a rich history that dates back to the dawn of civilization, gold is one of the most coveted precious metals and is used across the world for a wide variety of purposes. 

In the modern economy, gold has long been established as one of the most reliable investment vehicles. Investors buy gold as a portfolio hedge and to diversify risk, since overall gold has maintained a remarkably consistent market performance compared to other assets. This makes it one of the most sought after investments of all time.

A picture of a Florentine Florin.
The Florentine Florin maintained its weight and purity in gold for four centuries (Image source)

In the wake of the pandemic, many investors turned to gold to protect their portfolios against plummeting market conditions. As a result, gold’s price skyrocketed to over $2,000 in mid-2020. 

Regulations

The key difference between Bitcoin and gold lies in the regulatory infrastructure surrounding them. Gold is a widely accepted and well-regulated means of investment, storage, and value exchange across the globe. There are government-certified brokers and dealers for buying and selling gold. This significantly reduces the chances of fraud or scams, and it is almost impossible to create undetectable counterfeit gold. 

Bitcoin, however, is not recognized and regulated in most countries due to its inherent decentralized nature. Owning, buying, selling, mining, and trading Bitcoin is legal in most countries, and investors usually face little to no regulatory friction. 

With the popularity of cryptocurrencies rising each day, countries are slowly taking measures to recognize and regulate them. In 2021, for example, El Salvador made Bitcoin legal tender. And earlier this year, India made it a taxable asset. 

Utility

Another area in which Bitcoin and gold differ is utility—these assets have vastly different use-cases in the real world. 

Historically, gold has been used as both a currency and as raw material for the production of jewelry. It has also found use in luxury items, electronics, and dentistry.

A picture of gold's use in electronics manufacturing.
One of the most important industrial uses of gold is the manufacture of electronics (Image source)

Bitcoin, on the other hand, has little use in the real world but more applications in finance. Like gold, it is used for investment purposes, but unlike gold it’s also used as a digital currency to make easy payments across the globe. 

Bitcoin also has applications in decentralized finance (DeFi), an alternate financial system built purely on digital assets. Within DeFi, Bitcoin can be used for decentralized lending, borrowing, staking, and yield farming.

Liquidity

The liquidity of an asset is a measure of how easily it can be exchanged for fiat currency. In this regard, both Bitcoin and Gold are both very liquid. 

Investors can easily convert their Bitcoin to fiat on platforms like MoonPay, but some exchanges have upper limits so users may find it difficult to liquidate all of their Bitcoin at once. 

Gold, on the other hand, can be liquidated without limits. It is an asset that users can seamlessly move in and out of. The fact that physical gold is sold around the world and can be used as collateral to obtain loans also makes it better in terms of liquidity.  

Volatility

Both gold and Bitcoin are volatile assets. Bitcoin, however, can have far more price fluctuations than gold in a single day. Within just the past month, the price of Bitcoin fell from a high of $43,236 to a low of $30,574. This was a result of market trends and the media effect in which news prompts users to panic buy or sell, causing waves of fluctuations. 

A screenshot showing the fluctuations in the price of Bitcoin.
Bitcoin price and volatility (Image source)

On the other hand, the price of gold hardly moved from $1930/oz at the beginning of April to $1911/oz at the beginning of May–a change of less than one percent. The historical data clearly shows Bitcoin has a higher rate of volatility compared to gold.

Rarity

Rarity is a key factor when it comes to choosing one financial instrument over another, since scarcer assets are usually more valuable to the investor. 

As mentioned earlier, Bitcoin's total supply is limited to 21 million, 90% of which is already in circulation. But, in the case of gold, the scope for production is not limited. Data from the World Gold Council shows that mining companies have extracted close to 190,000 metric tons of gold so far, while an additional 3,300 is produced every year. So every time the demand for gold increases, the market balances it out by producing more. 

A picture of a modern gold mine.
A modern gold mine (Image source)

Gold mining could eventually become economically unsustainable. However, as long as there is demand for gold, in practice, it will have unlimited supply until the extraction rate surpasses the replenishment rate.

For Bitcoin, however, this isn’t the case. Its supply is absolutely finite and cannot be inflated under any circumstances. Moreover, the number of Bitcoins produced is halved roughly ever four years. So in this sense, Bitcoin is the rarer of the two assets.

Inflation hedge

The scarcity of gold has long maintained its position as the best hedge against inflation. With Bitcoin emerging as the scarcer of the two assets, however, one could argue that Bitcoin is a better hedge against inflation. This is one of the reasons why Bitcoin is considered to be digital gold. 

Global economies increase their currency reserves by buying government bonds to lower the rates of interest. This inadvertently leads to rising inflation. In March 2022, inflation in the US rose to about 8.4%—the highest since 1982. This signifies that a dollar today has 8.5% less purchasing power than it had a year ago.  

Hedge investments protect against such declines in purchasing power by outperforming inflation. Gold, for instance, has outperformed inflation by increasing in value as the dollar declined. Bitcoin, with its iron-clad scarcity, is poised to outperform even gold. 

In fact, Bitcoin’s price has increased a staggering 9,000,000% between 2010 and 2020. In the same decade, the value of gold saw only a 26% increase. So despite Bitcoin’s frequent market fluctuations, its value and price have seen a consistent increase over the years, acting as a decent hedge against inflation.  

Which is a better investment?

Both Bitcoin and gold come with their fair share of benefits and risks. Bitcoin is a riskier asset because of its lack of regulatory infrastructure and higher volatility, but of course this also means that it can bring a higher return on investment.

The decision to invest in either of these assets  comes down to the individual investor’s goals and appetite for risk. For those with a slightly higher risk tolerance, Bitcoin would make for a great addition to their portfolio. 

For risk-averse investors, however, gold is the better option. With less volatility and risk, gold is more suitable for people seeking a stable value appreciation. 

How to buy Bitcoin and Gold

It’s very easy to buy physical gold through trusted online dealers like APMEX or JM Bullion

When buying Bitcoin, it’s important that you  avoid scams and frauds and trust only top platforms like MoonPay. 

You can buy BTC directly on MoonPay or through one of our many partner wallets using a credit card or bank transfer. 

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