There’s a narrative that says Bitcoin is a great hedge against inflation, like gold.
It might be true, but the proof behind the claim is a bit lacking.
Bitcoin is differentiated from gold in at least three ways.
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Bitcoin (CRYPTO: BTC) is, as you may have heard, often called by the catchy moniker “digital gold.”
But there are a handful of key differences between Bitcoin and real gold, which has long been used as a store of value and as a hedge against inflation. Here are three of the most important ones to know.
For Bitcoin to be an equally good hedge against inflation as buying gold, it needs to maintain its purchasing power in fiat currency over time. That way, as the fiat currency becomes more and more devalued, holders can buy the same amount of goods and services when they decide to convert their coins into fiat.
Consider this chart:
US Consumer Price Index: Purchasing Power Of the Consumer Dollar data by YCharts
At first glance, Bitcoin actually looks better than gold over the last five years when it comes to holding value against declining purchasing power denominated in dollars. But this is a bit deceptive.
Gold has been in use as a store of value for thousands of years. Its rarity is well established. If you really wanted, you could make a chart of its value over time that would cover a longer period than any of the fiat currencies that currently exist and can be exchanged for it. And that chart would be ironclad proof that gold is a good inflation hedge, as it literally retains its value to the point at which it outlives many lesser stores of value.
Bitcoin simply doesn’t have that history of use. It only launched in 2009. The idea that it’s worth any serious sum at all is even newer than that. And while its supply is finite — only 21 million coins in total can ever exist — it hasn’t yet outlasted any of the fiat currencies that it’s exchangeable for. So it isn’t proven to protect against purchasing power erosion by inflation, even if in its history so far it has outperformed gold.
Image source: Getty Images.
Gold is an important metal that’s used in consumer electronics, scientific instruments, jewelry, and even in some foods and liquors, though it isn’t very tasty for those applications. It’s also quite shiny, which, knowing human psychology, makes people want to own it.
But Bitcoin can’t be used for anything except storing value. There’s no industrial process that requires it. It isn’t a component of any physical thing you use. And, being digital, it’s difficult to show off to others.
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Therefore there’s not any utility value in Bitcoin like there is in gold. That isn’t an issue that precludes it from protecting investors from the impacts of inflation, but it does suggest that if scarcity of tangible goods ever becomes a real issue, gold might hold up better, as Bitcoin isn’t a commodity that’s needed for production.
Over the last 10 years, Bitcoin has mostly gone up — except for a couple of times when it lost approximately 80% of its value, and except for another couple of times when it lost around 40% of its value. It’s volatile. And for a store of value that’s intended to preserve purchasing power over time, that’s a terrifying attribute to have, as it means the value of your asset may not be anywhere near where it was a month or two ago when the occasion arises that you need to use it to pay for a purchase.
Gold’s price has also increased in the same period. But what it hasn’t done in the modern era is experience corrections that are anywhere near as sharp as Bitcoin’s. That isn’t to suggest that its price has been completely upwardly mobile, either; there have been long periods of its value remaining relatively static, or lower than during its boom periods. The point is that on average, you’re more likely to be able to count on most of its value being around when you need it.
It’s technically possible that Bitcoin’s volatility will eventually decrease somewhat as more of its supply is mined, and as more of its supply becomes concentrated in the hands of sovereign actors or corporate treasuries that aren’t as prone to selling off their holdings as the widely distributed holder base is now. Still, until there’s proof of that happening, expect it to continue being a lot more volatile than gold, not to mention a lot more volatile than assets like stocks or real estate.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
Is Bitcoin Truly “Digital Gold”? 3 Ways the Leading Cryptocurrency Diverges From the Most Popular Inflation Hedge was originally published by The Motley Fool
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