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Will Bitcoin Become the Next Gold?

Erica Stephenson - Apr 02, 2021
As bitcoin continues to hit record highs, it has garnered much attention and fueled an ongoing debate: Is bitcoin the next gold?
Coin image

As bitcoin continues to hit record highs, it has garnered much attention and fueled an ongoing debate: Is bitcoin the next gold?

The current economic environment has helped to support bitcoin as an alternative asset in the search for safety. Today, central banks continue to push the limits of monetary policy by expanding their balance sheets, while government stimulus spending has been unprecedented, increasing debt to levels not seen before. As a result, some investors have turned to bitcoin when looking for a store of value - to act as a hedge against uncertainty and potential currency depreciation or inflation.

Gold - and Bitcoin? - As a Store of Value

Traditionally, gold has been considered the preeminent safe-haven asset. Its qualities make it a recognized store of value: it is doable, fungible, divisible, portable and scarce. Proponents of bitcoin would argue that it, too, possesses these qualities. However, while other precious metals, like platinum, may also have these characteristics, what distinguishes gold - and now increasingly, bitcoin - is the collective belief in its shared value.

Bitcoin: The Move to Mainstream

Over recent years, one of the most significant changes has been bitcoin's move into the mainstream. There has been an increasing acceptance of bitcoin, perhaps partially driven by its rise in value. Many high-profile institutional investors and companies now hold and accept bitcoin, which has helped increase its utility.

A digital payment systems have become more mainstream, even governments and central banks have begun to adopt, accept and develop digital currencies. Bitcoin is now one of hundreds of crypto currencies that exist today.

While it is likely that crypto currencies are not going away any time soon, there are reasons to exercise caution when considering bitcoin as an alternative asset. Here are three:

1. Unclear Valuation - there is considerable debate over what is the fair value of bitcoin, since it is simply the product of open-source software. Some argue it lacks intrinsic value when compared to other assets.

2. Significant Volatility - Since its inception in 2009, bitcoin has been subject to unpredictable and drastic price swings, perhaps a consequence of being a new asst. In January alone, the price dropped by almost 20 percent on two occasions.

3. Security Concerns - like many things of value, bitcoin has been targeted by unscrupulous individuals. Platforms that buy and sell bitcoin are often unregulated. Bitcoin transactions can be subject to fraud and theft, perhaps facilitated by that anonymity of the digital world. In 2014, the world's leading bitcoin exchange was hit by a cyber attack, and customers with losses had no recourse while the exchange filed for bankruptcy.

For now, the risks are likely to challenge bitcoin's viability as a stable safe-haven asset. However, as the digital world continues to transform, will bitcoin become the gold of our future?