The complete destruction of fiat currencies, led by the world’s global economic superpowers and their senseless money printing, has left many people wondering whether they should look to hedge themselves against the market. The hegemony of the U.S. dollar has been weakened and the actions taken in 2020 may only be the beginning.
Considering that a collapse may be imminent, now might be a good time to take a look at the popular store of value assets. Today we have two strong assets that may serve us in that regard: Gold and Bitcoin.
Both have served as a financial instrument that safeguards against inflation, but which one is more efficient in 2020? Gold may have a long history, but that does not mean that the disruptive technology found in Bitcoin cannot serve as a better option.
In the following sections, we will showcase bullish cases for both Bitcoin and gold. Moreover, we will also explain why one option may be better than the other for long term investors.
But before disclosing that information, let’s first see why we have a strong demand for SoV’s and why scarcity is so important in an age where paper currency lost its value.
A Store of Value (SoV) asset is simply an asset, commodity, or currency that maintains its value over a longer period of time without depreciating. Investors who seek to protect themselves during an uncertain period or against unprecedented events usually purchase SoV assets to protect their holdings.
Historically, rare metals such as gold have served as great SoV’s due to their scarcity and demand-to-supply ratio. As a matter of fact, most countries have based currencies and paper money on their gold reserves for a long time.
However, the situation changed through the course of World War 2 - specifically during the Bretton Woods conference. At that point countries all over the world have agreed to get rid of their traditional gold standard model in favor of another system.
From that point on almost all economies in the west have agreed to base their currencies on the official exchange rate of the U.S. dollar against gold.
The model remained very stable for a short time, but after numerous amendments made during the 70s by the U.S. government, the Bretton Woods Agreements had nothing to do with the modern economy.
As of 1976, most references to gold were removed from statutes and the definition of the dollar was changed. History then switched into a timeline where global economies were based entirely on pure fiat money, with limited reliance on gold.
Across all ages of human history, gold was used as the primary form of currency. Even when civilizations deemed gold to be too burdensome for transferring value, paper money backed 100% by gold was still used.
As we have already mentioned gold is a popular SoV option due to its supply-demand ratio, formally known as stock to flow ratio. The ‘stock’ of mined gold is too small compared to the existing supply, hence why it is the perfect option for storing value with yearly inflation of around 1.5%.
But with the aforementioned changes that Central Banks have made in the previous century, entire economies were completely redefined. With heavy reliance on the U.S. dollar, instead of gold, banks have paid a high price.
For many, the current system is based on nothing at all - no economic game theory that can support the value of fiat currencies. Countries like the U.S. are senselessly printing money to keep their economies afloat, in spite of future consequences.
Currencies resume losing value against each other while the value of commodities and assets keep increasing in an environment where salaries stay the same. As such, the purchasing power of a nation decreases while inflation rises.
In 2020 alone, the U.S. M2 money stock supply has increased by 24%. With incoming stimulus bills and further financial injections, it is easy to conclude that the supply of money will resume growing.
With the aforementioned points in mind, we see that fiat currencies are falling apart. As a result, many individuals are turning to SoV assets such as Bitcoin or gold. But why is Bitcoin a good SoV and is it better than gold?
Bitcoin is far more than just imaginary digital money. In fact, the coins are backed by real monetary value which is kept stable by the asset’s limited supply. Bitcoin is often referred to as digital gold and has been used as an SoV on numerous occasions, but why?
The anonymous creator Satoshi Nakamoto designed Bitcoin in such a way that it can generate only 21 million coins. This is the first efficient tier that gives value to Bitcoin, but is there anything else?
On BTC’s blockchain network, miners keep the system alive by validating transactions. In return, they are rewarded with Bitcoin for every block of transaction that is verified. For a sensible price evolution, Nakamoto added a 4-year system in which mining rewards are halved.
By doing so, Nakamoto made it possible for Bitcoin’s mineable coins to always remain drastically lower compared to the existing circulating supply. On that account, the leading cryptocurrency behaves exactly like gold as it keeps a stable stock-to-flow ratio.
With incredibly high scarcity, fungibility, portability, and divisibility, Bitcoin is a clear contender in the area of store-of-value assets.
As a matter of fact, three of these features are considered to be the properties of good money. But are the aforementioned features better in the case of Bitcoin compared to gold?
Those who believe that Bitcoin is ‘digital gold’ have three great reasons. BTC is not only great for its scarcity and limited supply but for its other characteristics which have historically been used to describe ‘good money.’
Scarcity and durability may result in a good asset, but these features alone are not enough for a currency.
If you wanted an SoV, a currency, and a speculative financial instrument all in one asset then Bitcoin is a perfect choice. Here are three reasons why Bitcoin is better than gold in this context.
Portability is obviously the first aspect that comes to one’s mind when comparing these two assets. Portability is the main feature of a currency as it allows individuals to seamlessly transfer value without any difficulty.
It may be easier to transfer $1 million worth of gold compared to $1 million worth of oil but can we do better? Bitcoin is naturally superior compared to precious and rare metals when it comes to portability as it only takes a few clicks to transfer value.
One million worth of gold weighs around 220 pounds. Besides the weight, we also need to account for the means of transportation, carry load, and security.
Depending on where you want to ship gold, it might take days if not weeks to do so. Administrative problems such as documenting the transfer and dealing with customs is yet another problem.
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On the other hand, Bitcoin is far less difficult to transfer. One small hardware wallet can carry limitless amounts of value. What is more important is the costs of conducting a transfer. At the time of writing, transaction fees hover between $5 and $10.
In what world can you transfer $1M in gold for such low costs? Even if we were to, for some reason, physically transport the hardware wallet it would still cost lower and take less time to do so.
Fungibility is an aspect that determines the ‘sameness’ of an asset. For example, two pounds of gold will have the same exact value as another set of two pounds of gold. This feature can be found in many other financial instruments, such as stocks, bonds, and even currencies.
The same can be said for Bitcoin. One BTC will always be equal to one BTC. The digital asset may be incredibly volatile in terms of value, but the coins themselves will always equal the same amount at a specific point in time.
For some in the industry, the fungibility of Bitcoin is debatable. The entire argument pours down to the traceability of transactions on the Bitcoin network. This creates situations in which certain coins are deemed to be illegal and are therefore banned for selling by exchanges.
But given that decentralized exchanges and other operators do not flag certain coins, the problem remains theoretical. In fact, Bitcoin is even more fungible compared to other traditional assets given that the sameness of coins is digitally coded and enforced.
The last aspect of ‘good money’ is divisibility. As the name implies, divisibility is a feature that enables an asset or currency to be split into smaller units. For example, gold can be cut down into smaller units and sizes and the asset will still retain its value in a specific denomination.
But Bitcoin is far better in this case given that every single coin is made up of one hundred million units called satoshis. With up to eight decimal places, it is easier to divide Bitcoin into smaller units than gold or other assets. The process is also seamless as well and does not require any physical actions or changes.
Now that we have finished discussing why Bitcoin is better than gold, let us also showcase in which respect gold is a better investment.
For many volatility and correlation are deal-breakers that prevent a user from utilizing Bitcoin as either a speculative or SoV asset. Bitcoin may have a limited supply but that fact has limited bearing on the asset’s incredibly high volatility.
Volatility might be perfect for day traders, but it is definitely not ideal for asset holders who wish to own an asset with a stable value over the long-term. Sharp and unpredictable moves in the market can result in bad experiences for users.
Gold may also considerably increase in price, but the rise occurs within a period of years if not decades. Therefore, gold is a ‘safe-bet’ given that it is unlikely to fall sharply on short notice.
Gold is also not heavily correlated to other assets while Bitcoin experiences periods of high correlation. BTC may mirror the price action of assets, commodities, and sometimes even currencies.
Investors have observed Bitcoin acting similarly to gold at certain times. In other moments, we have even seen Bitcoin mirror indexes like the S&P 500 or the DoW Jones industrial index.
Some investors consider this to be a negative factor since they do not wish for their investment to rely on the performance of other assets. While Bitcoin does not always act in correlation with other financial assets, it may still be a wise choice to rather invest in gold if this is a problem for you.
As paper money slowly falls apart investors are looking for either speculative or SoV assets that can help them hedge against the destructive markets. The U.S. money supply has severely increased in 2020 which significantly lowers the value of the dollar. With incoming stimulus bills and financial injections, the true value of the dollar will only resume weakening.
In this article, we have discussed why fiat currencies are losing their ground and why certain assets can help. Specifically, we have compared Bitcoin and gold to find out which asset is better.
Our conclusion? Bitcoin is definitely a better option in almost all cases. Its digital nature enforces a limited supply, fungibility, high divisibility, and great portability.
Moreover, some experts consider BTC to have an even lower inflation rate due to its cyclic reward halving which makes it even better than gold for long-term investors.
However, gold still dominates when it comes to safety. Gold has low correlation to other assets or financial instruments and its price is incredibly stable. It may be harder to transfer and invest in gold but it nevertheless retains its historical SoV function.
If you are looking to both invest and hedge, Bitcoin might prove itself to be a better option. Otherwise, you may look to buy gold if you simply want a hedge against the falling dollar.
Disclaimer: Articles posted to the Shrimpy Blog are not investment advice and should not be taken as investment advice. They are solely the opinion of the author. Cryptocurrency is volatile and risky, there is no guarantee the market will continue to perform well in the future. Take these opinions with a grain of salt.
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