If you’ve been paying attention to the news over the last few months, you’ve probably noticed the term “digital gold” being thrown around, usually when describing Bitcoin. Due to its scarce nature and surging value, many influential people in the financial world have started comparing cryptocurrency to gold. The debate sparked quite a while ago but the constant surge in Bitcoin’s price over the past few weeks has further strengthened the argument of its supporters.
Gold As A Financial Asset
The world’s most precious metal, gold, is estimated to have about 10 trillion USD market capitalization. This is an astonishing amount of money for a rock found beneath the surface. It is certainly used in making jewelry and can be quite resistant but there isn’t anybody, at least in the financial world, that will try to defend the value of gold due to its real-world uses.
One of the prime reasons for gold being worth so much is because its supply is predictable. Now, while some geopolitical events may change or alter the steady of its supply that is entering the financial markets, this supply is just the right amount. This allows it to be used as a means of payment but not so much that it would be worthless.
Hence, what makes gold valuable is that this metal is just the right amount of rare. If it was too rare, it wouldn’t be as popular as a store of value option for trade. Also, the metal that is selected to translate wealth into an asset couldn’t be too small or the coins would have been too small.
Then as per the gold network effect, some people decided that gold has value and accepted it as a means of payment in exchange for goods or services. This particular phenomenon has only continued and amplified throughout the years which is also the underlying reason behind gold being worth so much.
The Digital Gold
Over the past few decades, gold’s position in the global economy has been challenged. While gold was originally used to back many currencies, many are of the view that it is poorly adapted to the modern economic system. Nevertheless, it is a testament to the asset’s strength and the faith of investors that gold has largely outperformed a number of markets since then.
However, the digital currency Bitcoin seems to be threatening its position in the financial world. Since the cryptocurrency’s inception in 2009, Bitcoin has managed to vastly outperform gold, which originally was valued at less than a cent to its current status, hovering over $60,000.
With sky-high surges in Bitcoin’s price, arguments are being made that this cryptocurrency is very much a competitor to the gold market. It is also easily exchangeable, is an excellent narrative of decentralization that appeals to millennials, and offers robust security with cheap transactions which have helped increase demand for this digital asset.
Another reason for Bitcoin’s appeal among people is its ease of use and trade, especially since there are a number of trading platforms that aid both seasoned and novice users to make profits on crypto booms without even being an active trader. You can check out bitqt on how such a trading platform helps investors.
Many analysts within the crypto space have pointed out that the realized market cap of bitcoin may actually be much lower than expected. This is because some coins are lost forever while many others haven’t been moved in years. Currently, Bitcoin is only 2% of the gold’s estimated market cap and if it were to move to 10%, bitcoin’s price would need to be $154,000 per unit.
Hence, one thing is quite clear: it is still very early in the life of bitcoin and the cryptocurrency will not be replacing gold just yet. Gold has centuries of support behind it as the store of value assets and what actually matters with gold, as we’ve seen, is not the real world use but the trust placed in it by individuals and corporations.
Bitcoin, on the other hand, is currently only twelve years old. There simply just hasn’t been sufficient enough time to declare Bitcoin as the next store of value. And in order to become the de facto store of value, bitcoin needs something that price action and technology cannot replace which is the trust of investors. And trust, undoubtedly, takes a lot of time to build.