AlexanderVasiliev is the co-founder and CCO of the global payment network Mercuryo.
Ever since bitcoin began to grow in popularity, many people have come to call it “digital gold.”
And for valid reasons.
While the cryptocurrency‘s anonymous creator, Satoshi Nakamoto, originally intended bitcoin to function as a peer-to-peer (P2P) electronic cash system, BTC also possesses excellent store of value and safe-haven asset qualities.
Gold has similar store of value properties, with many conservative investors considering the precious metal one of the safest traditional investment instruments on the market. There’s 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, often calling the cryptocurrency a bubble.
That said, such statements about gold and bitcoin don’t reflect the full truth.
Bitcoin Beats Gold in Terms of Purchasing Power
To see the entire picture, it’s essential to analyze gold and bitcoin in regard to how the two financial instruments perform in terms of inflation hedges, stores of value, and safe-haven assets.
According to the Bureau of Labor Statistics’ Consumer Price Index (CPI), the United States Dollar has lost 11% of its purchasing power due to inflation in the last five years.
This shouldn’t come as a surprise as fiat currencies like the USD are inflationary due to the lack of fixed supply and continuous money printing practices of central banks.
For an asset to be a decent inflation hedge, it must maintain a value growth at or above the inflation rate to protect investors against the price depreciation of fiat currencies.
If we take a look at the SPDR Gold Shares’ (GLD) performance in the last five years via the chart above, we can see that the precious metal has maintained a value increase of nearly 54%, which is almost five times higher than the USD’s inflation rate.
For that reason, we can call the instrument an inflation hedge. But is it better in this field than bitcoin?
The simple answer is no. The chart above clearly shows that in the last five years – even after bitcoin’s recent price drop and 2018’s bear market – BTC maintained a price appreciation of nearly 7,500%, which is over 138 and 680 times higher than gold’s and the USD’s rate of inflation, respectively.
More Than Simply an Inflation Hedge
Throughout its twelve-year history, bitcoin has outperformed all other asset classes, increasing its purchasing power so significantly that it clarifies that the cryptocurrency is more than just a simple inflation hedge.
Due to BTC’s limited supply capped at 21 million coins, as well as the halving mechanism that cuts the new coin supply into half roughly every four years, the digital asset features a deflationary monetary policy that is hard-coded on the protocol level.
For that reason, there is no way to increase the bitcoin supply during times when the demand for the cryptocurrency is higher.
At the same time, due to the continuously decreasing flow of new supply, BTC will experience a long-term price appreciation even if the demand stays at the same level as it is now.
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 highly scarce asset, like oil its production can be increased or decreased based on the current demand.
However, due to the vast stockpile present on Earth and the complexity of gold mining, the precious metal’s annual production rate is usually at around 2% of the total supply.
For that reason and due to gold’s qualities 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 experienced a long-term price appreciation.
But, in this field, bitcoin has a major advantage over gold. While BTC can be easily utilized for P2P payments without any intermediaries, there is no system of buying products or services with a gold bar.
In terms of being a safe haven asset – a financial instrument that can retain or increase its value when the general market is in turmoil – both bitcoin and gold maintain a relatively low correlation with other asset classes.
Thus, both instruments have safe-haven-asset qualities that distinguish them from others in this field.
Bitcoin Is on the Road to Become 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, store of value, and a safe-haven asset.
Despite the criticism, many businesses and institutional investors have chosen to invest in bitcoin to safeguard their assets during the pandemic and the economic fallout that followed.
Tesla is an excellent case study for that, even with Elon Musk’s recent criticism concerning BTC’s high energy usage. The electric car maker generated 23% of its Q1 2021 profits only by selling some 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 from gold and become the standard asset to fight inflation and hedge against general market turmoil.
This is a guest post by AlexanderVasiliev. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
The President of El Salvador, Nayib Bukele, has invited bitcoin miners to take advantage of new facilities to be set up at a state-owned geothermal, electric company specifically for the industry.
“Our engineers just informed me that they dug a new well, that will provide approximately 95 [megawatts] of 100% clean, 0 emissions geothermal energy from our volcanos,” Bukele shared on Twitter. “Starting to design a full Bitcoin mining hub around it.”
The idea to use El Salvador’s volcanoes as a power source for Bitcoin mining apparently arose in a Twitter Spaces chat room hosted by Coin Metrics cofounder Nic Carter. The chat room held conversations around Bitcoin, mining, and how the largest cryptocurrency has a high penetration in developing countries, as Carter said in an interview.
Bukele’s moves might present opportunities for the Bitcoin mining industry at a particularly good time. Chinese miners, for instance, are experiencing a strong state crackdown on the sector, and might be encouraged to take advantage of El Salvador’s cheap and clean geothermal energy and relocate their rigs to Central America. Bitcoin mining acts as a purely free market and the geographic location of miners is determined in a game-theoretic way — while one country may ban it, another can always welcome it.
This Week In Bitcoin is a new segment covering the events of the week that occurred in the Bitcoin industry, covering all the important news and analysis.
Although bitcoin saw relatively steady gains over the last week, climbing to nearly $40,000, it was only a matter of time before Elon Musk started his fear, uncertainty and doubt (FUD) campaign again, tweeting a breakup meme alongside the Bitcoin hashtag early Friday morning, which sent the bitcoin price tumbling as much as 7%. Of course, this was to be expected since Musk cannot seem to resist spreading FUD, as he previously had with Tesla stock before the Securities and Exchange Commission (SEC) came knocking.
As the market geared up for Bitcoin 2021 in Miami this weekend, it seemed like there would be few developments during the week outside of the announcements at this conference. Indeed, El Salvador’s president announced that he will introduce a bill that would implement bitcoin as legal tender, becoming the first to do so and paving the way for others to follow. While this was major news coming from the conference, there was further news outside of Bitcoin 2021: Google lifted its 2018 ban on cryptocurrency advertisements on its network; the Finance Minister of Norway suggested an imminent breakout for bitcoin; Coinbase integrated its debit card with Apple and Google’s mobile wallets allowing payments with bitcoin; and Paxful launched Paxful Pay, allowing merchants to accept bitcoin as a payment method.
Chart Of The Week
Bitcoin has been gearing up for a breakout this week, nearing $40,000 before Musk decided to rain on the parade. Along with the continuous FUD, the current dip is nothing new if you’re familiar with bitcoin’s movement over the last decade. The chart above, courtesy of Bloqport, analyses the 2017 bull run, and clearly shows there were several sizable dips on the run up to $20,000.. The current bull run is no different and although there are more eyes and hands on Bitcoin this time around, there is no reason not to expect a breakout soon.
Bullish: Short Term
As I mentioned last week, the current bull run is far from over, and experts such as Cathie Wood agree. More and more people are suggesting a price breakout is imminent, so why should we even consider that not to be the case?
El Salvador’s decision to”‘legalize” bitcoin and make it legal tender in the country is incredibly bullish. As the first country to do so, El Salvador will not only act as a “guinea pig”, but will also pave the way for other countries to follow. In all likelihood, emerging markets will be the first to follow suit, especially those utilizing the US dollar as their reserve currency. The United States’ move to issue more bonds and print more money will have an impact on the dollar’s value, affecting those most dependent on it. El Salvador may be the first of many countries to embrace bitcoin.
Google’s lifting of the ban on cryptocurrency ads will have a major impact on the market over the coming months as it will be easier to gather impressions on Bitcoin content. Similarly, as Coinbase, Paxful and others follow PayPal in enabling payment for goods and services using bitcoin, it’s likely to see adoption grow, even if most die-hard bitcoin users would suggest HODLing. The naysayers who have spent years saying bitcoin doesn’t qualify as a currency because you can’t spend it anywhere will go quiet, much like they do when price quickly ascends.
Institutional investors are seeing an increase in interest in assets such as bitcoin, with Standard Chartered and Guggenheim Investments both looking toward introducing funds with bitcoin exposure. Then there’s the Taproot upgrade that appears to be a done deal for the Bitcoin network as more and more miners signal their support. Taproot will bring more privacy, lower transaction fees and more flexibility around smart contracts on the Bitcoin network.
Bullish: Long Term
I am revising my long term outlook from last week to bullish. Although this bull run will eventually peak and see a sizable correction in the near future, there is increasing hope for bitcoin in the long term.
Besides miners moving to “greener” equipment and sources of electricity, states like Texas and countries like El Salvador’s favorable embrace of bitcoin is likely to generate more sovereign entities to follow suit. Companies moving to accept bitcoin will not only benefit consumers and merchants alike but the market as well, despite its volatility.
As the legal framework starts to form around the world for bitcoin, we’re likely to see more investors join the fray. Whether Bitcoiners like it or not, increasing amounts of institutional investors investing in bitcoin is likely to bring more individual investors, as the former brings more security and trust to the community for the latter.
Saying things like “look at the bigger picture” or “every cloud has a silver lining” may seem cliché, but it’s true when approaching the current state of the market. Yes, it would be great to see a breakout and bitcoin surging past $65,000 in the next week or two, but it’s important to take a step back and look at what’s to come.
Bitcoin’s performance may not appear too favorable with the dips and sideways movement over the last few weeks, but it has remained relatively steady. I am sure the news and events from the past week have not been priced in, though whether that’s due to newcomers selling off in a panic or whales suppressing the price is unclear. What is clear is that Bitcoin is seeing a favourable reaction from the world. Countries are opening up to the idea of Bitcoin and large companies are jumping onboard.
Yes, Bitcoin still has a long way to go in terms of mass adoption, but it’s easy to forget that it’s market cap is in the hundreds of billions of dollars. The world’s leading investors and companies either hold it on their balance sheets or are considering doing so. One thing is for certain: Bitcoin has already made its mark and it is here to stay. No amount of FUD, misinformation or “expertise” can deny that.
Overall, the short term looks bright and, to use a phrase I read on Twitter,let’s shake out the “mayo hands” and get bitcoin to the moon.
This is a guest post by Dion Guillaume. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.