Over the past decade, Bitcoin (BTC -3.96%) has catapulted into the spotlight as the premier cryptocurrency. Along the way, multiple narratives have arisen to justify an investment in Bitcoin. One of those is that it is like "digital gold" because, like gold, it can act as a store of value and a hedge against inflation.
So if Bitcoin is basically digital gold, which is the better investment?
Image source: Getty Images.
The tale of the tape
To start, let's talk about the concept of a store of value. A store of value is an asset that preserves wealth and acts as a counter to economic declines and inflation, with the expectation that it will also appreciate over time. Gold has long been considered to meet this criterion.
When we compare the price of both since Bitcoin was created in 2009, it becomes clear that while gold does a fair job at preserving wealth, it comes nowhere near the combination Bitcoin provides of preserving and growing wealth.
What the numbers say
Since 2009, the inflation-adjusted return of gold annually has been about 3.3%, and the total return has been about 57%. In the same period, Bitcoin has an inflation-adjusted annualized return of nearly 145% and a total return of 33,983,965%.
Now, clearly there is a flaw in this comparison because gold has been in existence for millennia and Bitcoin has only been around for 14 years. So let's take it back further.
Since 1980, gold's performance has proven lackluster, generating an annualized return of 3.1% before inflation. After we account for 40 years of inflation, gold produced an unappetizing annualized return of -0.24% and a total return of -10.1%.
From this angle, it becomes clear that not only does Bitcoin outpace gold in terms of preserving wealth as a store of value and as a hedge against inflation, it also does an excellent job of growing wealth.
Why Bitcoin?
But to truly understand how Bitcoin has risen to this level, it helps to understand how it improves upon some of the primary characteristics that originally made gold attractive to investors.
Bitcoin and gold both exist in finite amounts. But Bitcoin takes this a step further. While gold is finite in the sense that it is a physical resource that needs to be mined, its supply is not fixed and can fluctuate based on mining activity and new discoveries. However, Bitcoin's supply is fixed at 21 million coins, and new coins will gradually enter circulation at a diminishing rate until the year 2140, when the last Bitcoin will be mined.
Another advantage of Bitcoin over gold is its portability and ease of transfer. Bitcoin can be sent anywhere in the world in a matter of minutes, without the need for intermediaries such as banks or payment processors. All one needs is an internet connection.
In addition, Bitcoin has a high degree of divisibility, with each coin divisible into 100 million satoshis. This makes it easier to use Bitcoin as a medium of exchange for small transactions, something that isn't as feasible with gold. While Bitcoin as form of currency hasn't quite materialized like some might hope, there is progress being made thanks to growing adoption of payment solutions like the Lightning Network.
Finally, it is worth mentioning the technological advancements that Bitcoin represents. Bitcoin is built on blockchain technology, a decentralized digital ledger that is immutable and transparent. This means that every transaction that takes place on the Bitcoin network is verified and recorded on the blockchain, making it virtually impossible for anyone to alter or manipulate the data. This level of transparency and security is unprecedented in the world of finance and represents a significant leap forward.
Consider these additional characteristics and the simple fact that Bitcoin has recently dominated gold in terms of its performances as a store of value and inflation hedge, and it becomes clear that an investment in Bitcoin today could prove valuable. In a world that is becoming increasingly digital and as the need for alternatives to inflation-prone fiat currencies persists, Bitcoin is in a unique position to benefit for decades to come as increased demand runs up against its finite supply.
