Bitcoin, Gold and Silver: A Historical Overview
One of the central narratives that helped Bitcoin (BTC) become a trillion-dollar asset is its utility as a store of value. An unavoidable comparison that BTC is constantly subjected to is that of time-tested precious metals such as gold and silver. Both gold and silver have been an indispensable part of global commerce for thousands of years. The function of these two precious metals has undergone significant transformations over time, from initially being used as a medium of exchange to becoming a haven for value during uncertain economic conditions. In comparison, Bitcoin is a relatively novel phenomenon with only 13 years of existence.
In this guide, we will investigate the rise of Bitcoin and its transition to becoming a reliable asset class. We will explore the key differences between Bitcoin, gold, and silver regarding regulations, liquidity, longevity, and other factors. And develop an understanding of Bitcoin’s key advantages over precious metals and vice-versa.
The Rise of Bitcoin
Satoshi Nakamoto launched Bitcoin in 2009 to create a purely decentralized peer-to-peer electronic cash system without any third-party interference. Over the past decade, it has cemented itself as a digital store of value with a current market cap of more than USD 500 billion. Many factors can be attributed to this meteoric rise. However, three prominent factors are thought to have had the largest impact.
Distrust in Traditional Financial Institutions
The collapse of Lehmann Brothers in 2008 put a significant dent in the public’s trust in Wall Street as an efficient financial authority. The ripple effects reached the then US government which faced the public’s wrath due to severe job losses and a high uptick in the unemployment rate in the world’s largest economy. The not-so-evident need of the hour was a network that is under no risk of being corrupted and is publicly available for everyone to see and use whenever they want.
As a result, Bitcoin was launched and leveraged the benefits of the underlying blockchain technology to ensure complete transparency, accountability, and immutability to ensure there is no repeat of the 2008 Financial Crisis.
Bitcoin as an Inflation Hedge
The second reason behind Bitcoin’s rise is its utility as an inflation hedge. People living in countries under authoritarian regimes often find themselves at the mercy of the ruling authority when managing personal finance. Countries such as Turkey, Lebanon, and Venezuela have witnessed unprecedented inflation rates due to factors such as inefficient central banks, international blacklistings, and trade sanctions. The Turkish Lira plunged by almost 45 percent against the USD in 2021. As a result, the price of essential goods and commodities skyrocket. And it is no surprise that these countries consistently rank among the top nations with the highest rate of crypto adoption.
Eighteen percent of Turks owned Bitcoin in 2019 during the peak of the country’s financial crisis, and more than 17 million Russians (close to 12 percent of the population) now own some form of cryptocurrency.
Bitcoin as Censorship-Resistant Money
Bitcoin’s Proof-of-Work-based (PoW) consensus mechanism ensures decentralization of the network, and no single entity can have control over the network. The Bitcoin network is the most decentralized in existence and continues to grow stronger, with an increasing number of validators joining the network every day. As a result of its decentralization, anyone can trust the Bitcoin network to securely send and receive BTC anywhere in the world.
Has Bitcoin Established Itself as a Strong Asset Class?
An asset class is typically characterized by steady price movement, longevity, and conducive regulations. As it stands, Bitcoin checks all these boxes.
Bitcoin effectively started from a price of $0 to its current price of more than $23,000. The demand for decentralized money and a store of value is evident. Recently, major Wall Street bank Goldman Sachs stated that it is now time to take Bitcoin more seriously as an investable asset.
The second factor that marks an asset class is its longevity. There is a reason why Bitcoin is not considered the same as other cryptocurrencies. Most alternative cryptocurrencies or altcoins have vanished over the years due to lack of utility, but Bitcoin has stood the test of time since its launch in 2009. Today, Bitcoin is an almost 15-year-old asset that commands a market cap of more than $550 billion. Bitcoin’s mining mechanism incentivizes miners to continue validating transactions on the Bitcoin network to not only secure it but also to earn block rewards in the form of BTC.
We are also witnessing an unprecedented growth in pro-crypto regulations around the world. Bitcoin is legal tender in El Salvador and the Central African Republic, where citizens can use BTC to pay for everyday transactions and safeguard themselves from rampant inflation. In the US, crypto regulation has become a bipartisan issue with several pro-crypto representatives from both the Republican and Democratic political parties, such as Senator Ted Cruz, Senator Cynthia Lummis, and others.
That being said, there are still several factions that are not entirely sold on the idea of a decentralized network that functions as a store of value and a reliable asset class. Traditional investors, in particular, continue to compare Bitcoin with precious metals such as gold and silver. In the next section, we will try to understand some key differences between the world’s premier cryptocurrency and two of the longest-standing, time-tested stores of value.
Key Differences Between Bitcoin and Gold, Silver
The first difference between Bitcoin and precious metals is how it is regulated. Regulations play a crucial role in every asset’s trajectory towards mainstream adoption. In the early years of gold and silver trading, the regulations were very loose (similar to the early years of crypto trading). However, their growing popularity as a reliable asset class forced countries worldwide to develop exhaustive regulatory frameworks. In the USA, if someone is interested in trading gold futures, they will be required to open a CFD account with an authorized financial institution or bank. In Australia, you must open an account with ABC Bullion if you are trading gold worth more than AUD 4,999. Silver regulations are identical to those of gold. In the US, individuals must report any sale of silver worth more than USD 1,000.
As for Bitcoin, regulations are much clearer today than they were five years ago. It can be argued that there has been a rise in both pro-crypto and anti-crypto regulations around the world. Countries such as Singapore, Switzerland, and Portugal are considered some of the most crypto-friendly countries in the world. They charge minimal tax on crypto trading and incentivize crypto businesses to operate within their county.
Conversely, countries such as China and India have adopted strict policies toward cryptocurrencies. For example, earlier this year, India slapped a flat 30 percent tax on all crypto sales in the country. In the same vein, China has outlawed crypto trading and investments in the country and imposed a strict ban on Bitcoin mining, leading to an exodus of BTC miners from China to other countries.
For any asset to be widely adopted, liquidity is of utmost importance. High liquidity means it is easier to readily sell an asset in the open market, while low liquidity implies difficulty in selling an asset.
Both gold and Bitcoin are highly liquid assets. In early March, a report stated that there is $170 billion daily liquidity for gold, including registered over-the-counter transactions. In comparison, Bitcoin’s exchange volume stood at $13.5 billion per day.
By comparing the daily liquidity of the two assets, we see that gold currently enjoys higher liquidity. However, Bitcoin scores better in terms of asset utility and growing adoption. As time goes on, Bitcoin’s trading volume will gain and eventually catch up to gold’s daily liquidity.
In terms of longevity, precious metals outdo Bitcoin as they have been in mainstream use for centuries. One of the main reasons gold is considered a haven throughout the world is its unparalleled longevity.
Before the dollar standard, the world operated on the gold bullion standard. Local fiat currencies were linked to the price of gold. Bitcoin, which has existed for only 13 years, pales compared to gold and silver’s history.
However, Bitcoin’s novelty should not be confused as a shortcoming. It is the first and, more importantly, the most decentralized cryptocurrency on the planet. The Bitcoin network is expected to reward miners until the year 2140, when all 21 million BTC are mined. After 2140, miners are expected to earn revenue through transaction fees on the Bitcoin network, which will help carry the Bitcoin network into the future.
As Bitcoin is a relatively new asset and often witnesses heightened volatility. Especially during macroeconomic uncertainties and economic distress like the COVID-19 crash in March 2020. However, as Bitcoin’s adoption increases and liquidity grows, its price volatility will reduce. Compared to its price action in 2013 or 2017, Bitcoin’s price action today is far less volatile due to a significant increase in liquidity.
On the other end of the scale, gold and silver are two of the least volatile assets in existence. The CBOE Gold Volatility Index — an up-to-the-minute market estimate of the expected 30-day volatility of gold prices — has been relatively stable over the past five years (barring March 2020).
Bitcoin’s Advantages Over Gold and Silver
Bitcoin is most often referred to as ‘digital gold.’ Bitcoin enthusiasts claim that BTC offers all the utilities of gold and more. To test how accurate this claim is, let’s go over some of the advantages Bitcoin holds over gold.
Ease of Portability and Censorship-Resistance
First, Bitcoin is easily portable and censorship-resistant. Anyone from any corner of the globe can seamlessly send and receive BTC at any time. There are no central custodians of the Bitcoin network. It is maintained by Bitcoin miners spread across the globe.
Bitcoin is also resistant to being censored. No central authority can seize your BTC if you hold it in a personal wallet. To ensure maximum safety, hardware wallets are recommended to store BTC.
No Counterfeiting Risk
Every Bitcoin sent or received can always be verified on the Bitcoin blockchain. It is impossible to produce fake BTC. Gold, on the other hand, often suffers from counterfeiting and fraud. A new survey conducted by the US Anti-Counterfeiting Task Force found that a whopping 43.3 percent of US coin dealers said they had encountered customers seeking to sell them counterfeit gold and silver coins.
No Storage Costs
Bitcoin is intangible, which means it requires no storage costs. Anyone can securely store BTC in their wallets without worrying about it getting stolen (assuming they secretly store their seed phrase and passwords securely).
On the other hand, Gold suffers from high storage and logistics costs and must be stored in a safe place such as commercial bank lockers. Storing gold in banks means you not only give up on its self-custody but are also required to pay a service charge to the bank for storing your gold.
Gold and Silver’s Advantages Over Bitcoin
Unlike Bitcoin, both gold and silver are tangible, and a major tangible utility for both metals is their use in jewelry. The cumulative USD value of the jewelry market worldwide sat at $228 billion in 2020 and is expected to balloon to $307 billion by 2026.
Even excluding its use for jewelry, the total market cap of gold stands at over $3 trillion. Gold’s properties, such as being a superior conductor of electricity and its corrosion resistance, make it an essential raw material for numerous electrical and technology applications.
As for silver, it is used for jewelry, tableware, mirrors, dental alloys, solder and brazing alloys, electrical contacts, and batteries. These real-world utilities play an important role in giving gold and silver some monetary value that can be priced in the market.
Both gold and silver are time-tested stores of value. They enjoy greater popularity among the older generation, while digital currencies such as Bitcoin are more popular among Millennials and Gen-Z. Gold and silver were used as a medium of exchange across the globe for generations, much like how fiat currency is used today.
Over the years, their utility changed from being used as a medium of exchange to a store of value. Accordingly, appropriate regulations were introduced to regulate gold and silver to counteract counterfeiting, prevent fraud, and the monopolization of valuable commodities.
In comparison, Bitcoin is a relatively novel idea. But this does not mean that BTC can never succeed as a dependable store of value. As Bitcoin sees further adoption and greater liquidity, the volatility associated with it will dwindle. Subsequently, Bitcoin will enjoy greater trust among the current BTC skeptics.
Do Institutional Investors Prefer Bitcoin or Gold?
A metric of adoption for any asset class is its popularity among institutional investors. While gold is one of the favorite assets for institutional investors, Bitcoin is slowly catching up.
The past three years have been nothing short of monumental for Bitcoin in terms of institutional adoption. Microstrategy, one of the top US-based business intelligence firms, was one of the first institutional investors to add BTC to its balance sheet. The move helped cement Bitcoin as a viable hedge against inflation.
Other companies did not take long to follow in MicroStrategy’s footsteps. Elon Musk’s Tesla announced in 2021 that it had added $1.5 billion worth of Bitcoin to its balance sheet. In February 2021, payments company Square announced that it had purchased approximately 3,318 BTC worth $170 million.
Similar moves were replicated by companies in other parts of the world too. Meitu, the Chinese photo-editing app, announced it had bought Bitcoin worth $22.1 in March 2021.
Bitcoin could soon give gold a run for its money as the asset of choice among institutional investors. Wall Street is already aware of the rising popularity of Bitcoin as an inflation hedge and a store of value and has commenced offering Bitcoin services to its accredited clients. For example, Goldman Sachs recently made its first bitcoin-backed loan when it allowed a borrower to use BTC as collateral for a loan.
What Should You Hold During an Inflationary Environment?
Now that we have discussed the merits of both Bitcoin and precious metals, the question is what investors should hold during an inflationary environment.
While there is no definite answer to this, we can use historical performance as a reference point to predict how these assets would typically perform during periods of high inflation. Gold is a proven store of value that has withstood several periods of inflation over the years. Gold’s past performance as an inflation hedge still places it as the safest option for investors. Its value typically tends to rise with the price of goods. If we look at data from the past 50 years, we see that gold prices have always kept up with inflation, resulting in increased purchasing power of the precious metal. In contrast, the US dollar has lost value and purchasing power during periods of financial distress.
As for Bitcoin, the premier cryptocurrency has performed well in the face of inflation. Evident from its rapid growth in price and strong demand among both institutional and retail investors. Bitcoin witnessed a parabolic run soon after the March 2020 market crash and the subsequent printing of money by the US Federal Reserve. The excess supply of USD in the economy led to rampant inflation worldwide. As expected, Bitcoin continued to rise in price as it hit an all-time-high value of approximately $69,000 in November 2021.
As a hedge against inflation, both Bitcoin and precious metals act as ideal safeguards. Precious metals (especially gold) have the advantage of centuries of proven performance but are limited in utility. As Bitcoin establishes itself over the coming decades, it will likely replace gold as the go-to store of value for institutional and retail investors alike.