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Bitcoin And Gold Bars On Balance Scale
Money; Shutterstock

Bitcoin was conceived as an alternative to the U.S. dollar. Increasingly, many crypto fans see it as the new gold.

For decades, gold bugs have exalted the precious yellow metal as the ultimate “store of value,” protecting their savings against the corrosive effects of inflation. Enter the Bitcoin bugs. In recent months, many cryptocurrency advocates, including billionaire Mark Cuban, are insisting that the digital currency can do a better job keeping pace with rising prices than gold. They argue that its existence entirely outside the conventional financial system will make it even more independent of the dollar and other mainstream assets.

“Bitcoin has been more of a store of value than a payment system in the U.S. It’s the digital version, essentially, of gold. It has limited supply. It’s not controlled by a central government or a central bank,” says Ben Weiss, chief executive of Bitcoin ATM network CoinFlip. “What you’re seeing is a lot of millennials, who would have bought gold to hedge against inflation 20 years ago, are buying Bitcoin.”

Cuban put it in a blunter fashion in a June tweet. Bitcoin is “BETTER than gold,” he tweeted.

How gold protects you from inflation (in theory)

Gold has been used for decades by investors concerned about inflation and its erosion of sovereign currencies’ buying power. The argument is that gold’s scarcity and permanence makes it a better store of value than paper money, which has boundless supply and depends on government backing. In theory, the U.S. dollar could go the way of the mark in Weimar Germany or the Zimbabwean dollar in more recent times if Washington keeps printing more and more money.

But price charts indicate that gold’s performance during periods of high historical inflation is mixed, at best. For example, gold futures languished for much of the 1970s even as inflation roared, only catching up with rising prices in the last year or two of the decade.

Gold’s limitations as an inflation hedge are even more dramatic this year. With consumer prices rising at their strongest pace since 2008, gold is down 11%. By contrast Bitcoin bugs point to the digital currency’s roughly 40% increase in value for 2021, even after a recent crash.

How Bitcoin protects you from inflation (in theory)

The architects of Bitcoin, in their 2008 white paper signed by Satoshi Nakamoto, clearly had the precarious value of paper money on their minds. One of the biggest distinctions between Bitcoin and conventional currencies was the decision to cap the number of bitcoins that could ever be created at 21 million.

In the white paper, the designers promised the strict limits on supply of Bitcoin would make it “ completely inflation free.” The digital currency remains scarce, with about 19 million bitcoins created so far. That’s because of the “diminishing rewards” provided to miners, said Zak Killermann, a writer and publisher at financial-technology site Finder.com. Like gold, new supply of Bitcoin becomes harder to excavate as time passes, with miners having to work twice as hard for each bitcoin after each four-year cycle.

“No government can make more gold and no government can make more Bitcoin,” said Weiss, the chief executive of CoinFlip. Bitcoin advocates also point to the advantages presented by Bitcoin’s digital state, saving on the hassle and expense of storage, access and security associated with gold.


Gold vs Bitcoin

Recently, Federal Reserve Chairman Jerome Powell acknowledged that some investors view Bitcoin as an alternative to gold, but warned of a shortcoming for cryptocurrencies as a store of value: their volatility.

“A more traditional store of value, such as gold and other precious metals, isn’t nearly as volatile as Bitcoin nor could they ever conceivably fall to near zero in terms of value, which is entirely possible for crypto currencies,” said Nicholas Creel, a professor of business law at Georgia College and State University.

The Bitcoin bugs have an answer to this critique.

One measure of an asset’s effectiveness as a “store of value” is its Sortino ratio, a gauge that adjusts returns to account for volatility, according to Lennard Neo, head of research at Singapore cryptocurrency investment firm Stack Funds. Investors cannot have peace of mind if prices are all over the map on a daily basis — even if they are rising on a long-term basis.

Despite its reputation for higher volatility, Bitcoin has consistently surpassed gold’s Sortino ratio, according to a five-year chart on the casebitcoin.com Web site. This suggests gold has plenty of volatility, and that Bitcoin's explosive gains have made its higher risk worthwhile.

As Chairman Powell pointed out, buying either gold or Bitcoin is largely a speculative action. Even the most ardent Bitcoin bug would not recommend loading up on the digital currency beyond a 10% portfolio allocation. That’s about the same maximum allocation that Wall Street strategists traditionally recommend for gold.

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(An earlier version of this story misspelled Zak Killermann's name.)