Bitcoin and other crypto are often referred to as a digital version of gold, but how similar are they, really? This comparison is even more important given the recent bull runs underway in both markets as institutional interest in crypto continues to grow and accelerate.
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With all of the debate and conversation around the price and price volatility of bitcoin and other cryptocurrencies, it seems worthwhile to take a deep dive and see just how similar crypto is to its purported analog equivalent; gold. It is important to note that every cryptocurrency, just like every share of stock, should be evaluated and treated on its own. That said, there are some definitive parallels and comparisons that can be drawn between these two financial assets, but the argument for bitcoin (or other crypto) as digital gold may not be as clear cut as it might initially appear.
Some investors treat gold, other commodities, and cryptoassets as an inflation hedge, a speculative investment choice, or a fundamental part of the asset allocation process. In whatever case these financial instruments are used, however, comparatively few individuals actually use either one as a medium of exchange. Despite the lack of utilization, to date, the comparison and equating of gold to cryptocurrency continues. Given the large amounts of price volatility recently, revisiting this comparison seems like a logical course of action.
Let’s take a deeper dive and see how valid the labeling of crypto as a gold proxy or equivalent actually is by breaking down the usability of these instruments, evaluating them through the lens of whether or not they function as money, and the applicability of these instruments as a financial hedge.
Is it money? There are innumerable debates and questions around the validity of cryptocurrencies as a legitimate medium of exchange, and this is for good reason. The original idea and concept underpinning bitcoin, it is important to remember, was to create an alternative financial system not beholden to any central government or central bank. Many proponents of cryptocurrencies, from the beginning to the present, still firmly believe in this use case.
One fact that needs to be acknowledged, in the debate between gold and cryptoassets, is that a key factor in determining what can be used as a medium of exchange is whether or not the item is classified as legal tender in the jurisdiction in question. As of this writing there is still a large amount of legal ambiguity and confusion as to where cryptoassets actually fall in the spectrum of financial assets. In other words, gold and crypto are both envisioned as a medium of exchange, but the reality on the ground is not as clear cut.
Can it be used? Ultimately one the most distinguishing differences between gold and cryptoassets is the ease with which individuals or institutions can use and transport these financial instruments. Framed through this criteria, the comparability between gold and cryptoassets needs to take place in a comprehensive manner. Specifically, the usability and functionality questions need to not only assess the instrument itself, but also how the crypto or gold will be accessed.
For example, if the conversation is pertaining to gold, is it actually gold coin or gold bullion that is being analyzed, or is some sort of gold exchange traded fund? From a crypto perspective the conversation can even more nuanced; depending on crypto type and wallet choices the ease with which crypto can be used will vary widely. Stated slightly differently, bitcoin and other cryptocurrencies seem to have an edge in terms of access, usability, and functionality as a mass market fiat alternative.
Is it a hedge? While gold has long been seen and used a hedge against inflation as well as a speculative investment choice, cryptoassets are more recent entrants to the institutional investing landscape. One fundamental question that needs to be addressed is something that can often be overlooked; the redeemability of these instruments. To serve as an effective hedging instrument, as is of often stated as a secondary benefit of both gold and cryptocurrencies, investors and holders need to be able to exchange these assets for other financial instruments.
In other words, and in any situation, the value of these financial instruments and assets is derived in the form of the asset (dollars) that it is attempting to supplant. Put another way, when the conversation shift and evolves, and other assets begin to be priced in bitcoin or other crypto, that will represent a sea change in how these instruments function in the financial markets. This might seem like the most abstract comparison to date, but it is extremely important.
In any case or event, once a medium of exchange – be it dollars, spot gold, or bitcoin – serves as the baseline for how other assets and financial instruments are valued, that medium of exchange has achieved widespread adoption. As of right now the U.S. dollar serves this function in the form of a reserve currency, but this could always change over time.
Gold and cryptoassets, like every financial conversation, are topics and ideas that need to be assessed both on an individual basis, as well as their respective roles in the financial system. That said, before simply assuming these two asset classes are the equivalent of each other, it is worth drilling down and doing a deeper dive on these issues.
