Is bitcoin ‘digital gold’?

16.07.2022

Key points

Bitcoin is often dubbed “digital gold”, highlighting its store-of-value properties by analogy with physical gold.
There is no consensus on whether bitcoin is a safe-haven or a speculative asset. Only a few investors and organisations allocate to the first cryptocurrency as an inflation hedge.
Studies of bitcoin’s correlation with different asset classes show it behaves differently across market regimes.

What do bitcoin and gold have in common?

Satoshi Nakamoto envisioned bitcoin as a fully fledged means of payment, stripped of the flaws of fiat money. Chief among them is inflation, the gradual erosion of real value measured by purchasing power.

To counter this, bitcoin’s architecture embeds the following properties:

Issuance is capped at 21 million BTC. Miners will extract the last coin in the autumn of 2140.
The production of new coins declines over time. Owing to a programmed event known as the halving, bitcoin mining rewards are cut in half roughly every four years.

Gold has similar characteristics. As a natural metal, its supply is finite. And although production has been rising, it has not kept up with demand, and new deposits are found ever less often.

Finally, as with bitcoin, society has voluntarily recognised gold as a valuable asset that embodies value.

Has gold always been a safe haven?

An important similarity between bitcoin and gold is how they are used. For many years gold was not only a store of value but also a means of payment. Coins’ value and denomination were judged by their gold content.

In the late 19th century developed economies adopted the “gold standard”. Under it, gold served as the universal measure of value, and the state backed the worth of fiat money with its reserves of the metal. The issuing state guaranteed that banknotes could be exchanged for a specific amount of gold.

In 1944 Western countries concluded the Bretton Woods agreement, under which national currencies had fixed exchange rates to the dollar, which in turn was pegged to gold. A troy ounce of the precious metal was set at $35. The new monetary system, though replacing the gold standard, still rested on the price of gold.

The United States scrapped the dollar’s fixed link to gold in 1971, rendering Bretton Woods moot. Since then fiat exchange rates have been set by supply and demand in open markets. At the same time, persistent, if modest, dollar inflation became the norm.

Even so, from the 1980s until 2022 its annual rate did not exceed 2%. The dollar, as money, also remains the world’s reserve currency, a popular safe-haven asset.

Gold is no longer used for payments, but it has retained its value. The reason is its ability to preserve purchasing power: the economic incentive works against selling.

Why is bitcoin not recognised as digital gold?

Gold’s primary function as an investment asset is the ability to preserve and increase value during crises. When the economy enters a prolonged downturn, investors sell high-risk assets—such as equities—and buy stores of value, notably gold.

The gold price began to rise in 1972 and peaked in 1979. Over the next 30 years the precious metal traded roughly sideways, alternately gaining and losing.

It did not regain its 1979 peak (around $680 per troy ounce) until 2007. After that the global financial crisis hit, and by 2011 the metal’s price had almost tripled, topping $1,800. Over the next eight years the asset fell. It began to rise in mid-2019. The pandemic pushed prices higher, and in August 2020 quotations nearly reached $2,000.

According to evidence left by Satoshi Nakamoto himself, bitcoin was created in response to the 2007 crisis, which the United States “put out” through large-scale additional issuance of dollars. Since the launch of the network, its price has increased year after year. Over shorter periods, however, bitcoin is highly volatile, aligning it with high-risk assets.

Researchers have repeatedly found correlations between bitcoin and equities. In April 2022 Arcane Research said the first cryptocurrency’s moves were closest to those of technology stocks, considered a riskier segment of the equity market.

Several months earlier Goldman Sachs analysts warned that bitcoin’s price depends on macroeconomic factors and could fall as the Fed tightens policy. That is what later happened.

According to Bank of America, since 2021 the first cryptocurrency has correlated with equities. As an example, the bank’s researchers cited its correlation with key stock indices—the S&P 500 and Nasdaq 100. Therefore, bitcoin is not a safe-haven asset, the bank argues.

What argues for the ‘digital gold’ thesis?

There are also arguments in favour of bitcoin as a store of value.

First, prominent investors have spoken about its defensive properties. In 2021 the American financier Ray Dalio supported the “digital gold” thesis, although he later noted that the first cryptocurrency loses out to gold.

In April 2022 former BitMEX chief Arthur Hayes expressed the view that bitcoin will ultimately become a safe-haven asset because of Fed policy and the dollar’s debasement.

Second, a ForkLog study showed that during the 2020 crisis the first cryptocurrency correlated mainly with the precious metal.

Third, bitcoin can change its correlation with asset classes depending on market conditions. The view that the first cryptocurrency starts to behave like risk assets during market sell-offs was voiced in 2020 by The Block researcher Larry Cermak.

Another argument “for” is the practical use of bitcoin as digital gold. Despite its high volatility, several large companies already hold savings in the first cryptocurrency. According to the Bitcoin Treasuries website, these include Tesla, Core Scientific and Square.

One of the chief advocates of bitcoin as a safe-haven asset is MicroStrategy CEO Michael Saylor—his company holds nearly 130,000 BTC.

In addition, bitcoin is already used in sovereign reserves. Since 2021 El Salvador’s government has been buying bitcoin for its treasury.

JPMorgan believes bitcoin has the potential to become digital gold as institutions accept it in that role, but achieving this is constrained by the first cryptocurrency’s dependence on inflation.