For the last few years, many people have given Bitcoin the label ‘digital gold’. They saw it as something that has many parallels with gold. It’s scarce, desired, and a store of value with some utility. The thought was that in the event of a financial crisis, the BTC price would act somewhat like digital gold.
Now, we’ve faced a crisis of epic proportions, can we still call Bitcoin digital gold? Let’s take a look and see.
Bitcoin as Digital Gold
Bitcoin was designed as a completely new kind of asset. Something different from cash, stocks, or gold. It was intended to be the ‘money of the internet’ that has been so elusive. But, over time, people have struggled to find much utility in the digital token. Few retailers and stores accept Bitcoin as a form of payment, and that still isn’t changing very quickly. The stark truth is that Bitcoin still isn’t very useful in the real world.
But, there was one thing Bitcoin seemed to be excellent at, and that is storing value. If fact, Bitcoin has gone well beyond storing value, rising from $0 to tens of thousands of dollars each in a decade. It’s been one of the best performing investments in the world.
This is where people started to label Bitcoin as digital gold. You can buy it, use it for some things, but mostly earn money just by holding it. As Bitcoin isn’t linked or controlled by any central government, it could retain its value as currencies around the world lose their value due to money printing.
Many thought this would be especially true in a financial crisis. Crypto investors assumed that if stocks will start plummeting in price, everyone would flock to gold and Bitcoin to preserve their wealth. Now, we’ve had a crisis, and we can see if this has become a reality.
The Gold price through the crisis
The gold price throughout the coronavirus crisis has skyrocketed. While stock prices have plummeted, gold has gone way up. There was a sharp decline around mid-March, but that was quickly recovered and by May Gold was traded about 17% higher than it was in December. This is to be expected, as investors rush to sell stocks and buy gold in order to preserve wealth. This has happened in all crises in the past.
The Bitcoin price throughout the crisis
The Bitcoin price has taken a remarkably similar trajectory to gold in the opening few months of the coronavirus crisis. Throughout the crisis, the Bitcoin price has also gone up, with a major decline in mid-March. This was presumably as businesses and investors sold assets to gain much-needed liquidity. Bitcoin didn’t recover as fast as gold, but by May, Bitcoin was trading 25% higher than in December before the crisis really started to hit.
What we’ve learned
The price charts don’t match completely. But, put them side-by-side there is some strong evidence that Bitcoin is starting to step into its role as digital gold. The fact that the Bitcoin price has followed gold more closely than stocks shows that investors are starting to see it this way in their portfolios.
There were other factors at play during this time. In May, the Bitcoin block reward halving happened. The event was expected to come with price increases as it effectively halves the supply of new Bitcoins being created every day. As the price of Bitcoin is set entirely by supply and demand, a halving of supply can be expected to send the price much higher.
However, in previous Bitcoin block reward halvings, the price increase has been spread over one to two years. It’s very difficult to tell how much of the price increase is due to the crisis and how much is down to the supply reduction.
If we want to say Bitcoin has obtained the role of digital gold, we’re going to need more evidence over a longer period of time to see if it can live up to that label.
Bitcoin has survived the coronavirus pandemic crisis and the block reward halving so far, so investors are feeling a little more confident about it. But we likely have a very long way to go until things are back to normal.
For investors, the best strategy is to remain careful and vigilant with Bitcoin. Bitcoin may have acted like digital gold for a short period of time, but that does not mean it’s the same thing with gold. If you have your wealth invested in Gold, you can be almost certain it’s going to be safe in the long-term.
This simply isn’t true for Bitcoin. Bitcoin is a highly risky and volatile investment. At any time, the price of Bitcoin could collapse, something that would probably never happen with gold. There is a huge number of risk factors. A competing coin could come and take market share from Bitcoin, the mining network could fail to support the network, some vulnerability could be found in its code. Or, governments could simply ban it.
None of these risks apply to gold, and they are why gold is one of the safest investments in the world. Bitcoin may have started showing market characteristics of gold, but don’t let the label fool you into thinking it’s too safe.
Another big (but much more exciting) difference between Bitcoin and gold is that Bitcoin can also go much higher. If Bitcoin gains widespread adoption, it could double, triple, or even 10x in value in just a few years. This is not really possible with gold. Gold already has widespread appeal to mainstream investors globally, and this probably isn’t going to change too much.
So Bitcoin is moving more into the role of ‘digital gold’, but remember, it’s just a thin label. Bitcoin has fundamental differences, good and bad, to gold. Mostly, Bitcoin is much more exciting!