Amidst all the economic, financial, and social chaos caused by the COVID-19 pandemic, the year 2020 ironically ended up creating an extremely favorable scenario for cryptocurrencies that have led many persons and companies to purchase Bitcoin.
Definitely, 2020 was not an easy year for the global market, which led several capital managers, banks, insurance companies, and other traditional companies to adopt cryptocurrencies and other digital assets (e.g., Non-Fungible Tokens).
Bitcoin has always been accepted as a form of hedging in more flexible investment portfolios. However, the trend now is towards a gradual replacement of gold for the adoption of Bitcoin as the world's most valuable hedge.
Bitcoin vs Gold - An Honest Comparison
In fact, both Bitcoin and gold share some similarities. Both are scarce, highly divisible, transferable, expensive to mine, and have a supply that cannot be manipulated by governments or companies.
However, the similarities end here. While gold is a metal extracted from the soil, Bitcoin is a purely digital creation that only exists as information in a decentralized ledger that is structured on a distributed computer network.
Bitcoin's scarcity comes from its own programming code, which dictates a total supply of 21 million coins. Currently, the total circulating supply of the world's most valuable digital asset is around 18,694,000 BTC.
Gold Value Decreases While Bitcoin Market Cap Rises
Nowadays, Bitcoin has a market cap of $ 1.09 trillion, while gold has a total market cap of $ 10.9 trillion. It is crucial noting that the total above-ground stock of physical gold is estimated to be around 190,000 tons.
Until recently, when the market was experiencing great turbulence, the price of gold skyrocketed, as a sign that investors were looking for safer assets for hedging purposes.
However, things changed recently. Even at the pinnacle of the global economic crisis generated by COVID-19 in 2020, gold did not react as it should.
In addition, the growing distrust of national currencies following dubious policies by governments and central banks has encouraged an immense number of people to purchase Bitcoins to protect themselves from an eventual economic catastrophe.
Bitcoin vs Gold - What Does the FED Has to Say About It?
Jerome Powell, president of the Federal Reserve (Fed), stated on April 22, 2021, that Bitcoin could be a better substitute for gold than for the dollar.
During an event promoted by the Bank for International Settlements (BIS), he also stated that he does not believe in Bitcoin as a means of payment due to its high volatility.
Powell said that crypto assets are highly volatile, especially Bitcoin, and therefore are not very useful as a store of value. According to Powell, as digital assets are supported by no entities, they are purely speculative assets.
Hence, the President of the Federal Reserve believes that Bitcoin is more of a substitute for gold than for the dollar.
Furthermore, Powell believes that cryptocurrencies issued by central banks would have to be integrated into the existing payment system and coexist with physical money to be successful.
A Wise Man’s Opinion
Ray Dalio, the founder of Bridgewater Associates and manager of the most successful hedge fund in the world, recently wrote an article about his position regarding Bitcoin as a valuable asset.
Despite not being an expert on the subject of cryptocurrencies and alerting his readers about the fact, Dalio used all of his valuable knowledge of Economic History to understand what the future of Bitcoin will be like, including all the potential risks associated with it.
Dalio believes that Bitcoin is "one hell of invention". According to the author, those who built it and supported the dream of making this new type of money a reality did a fabulous job of sustaining that dream and turning Bitcoin into an alternative asset similar to gold.
However, Dalio's big question behind Bitcoin is how it can be used realistically and how much demand it will have, given that once the supply is known, the demand must be estimated to estimate the BTC price.
Consequently, Dalio believes in Bitcoin as a long-term option in a highly unknown future in which the author could put a sum of money in which he would not matter of losing about 80%.
A decade ago, it would be impossible to imagine having a discussion comparing Bitcoin and gold. For thousands of years, gold has been the world's safest asset, possessing an established system for trading, weighing, and tracking every ounce of gold in the world.
While both gold and Bitcoin are rare resources and have plenty of liquidity available in the market, the main discussion is if Bitcoin could replace gold as the definite hedging asset with all the volatility associated with the digital asset.