The founding partner of Adamant Capital, Tuur Demeester, has in a recent interview with Stephan Livera stated that bitcoin is maturing into a “full-fledged reserve asset, a full-fledged digital gold and full-fledged money”. Alongside Tuur, many other experts in crypto consider bitcoin as the digital gold. So why are these comparisons between bitcoin and gold being made by experts in the crypto game? Let’s take a dive in.
Gold has remained a standard of representing something of value since ancient times. It was used to trade and buy goods and was accepted universally as something of importance. As the banking system evolved, paper money came into circulation with banks keeping the gold reserves to themselves. Paper money is mostly backed by gold due to which its value in society is accepted by the people. Gold was and is still the standard in the current monetary framework of the world. Currently, United States holds the biggest gold reserves in the world.
Gold standard presents forward a measure to compare things of value with it. For the ease of payments in the real world, over time, using gold in itself got replaced by paper money with numbers representing the value that a particular paper note carries. A currency note’s value in the real-world is fixed and represented by its peg with gold or some other currency.
After the economic crisis of 2008, trust regarding banks started to diminish in the eyes of the general public. Amid the financial chaos, bitcoin emerged as the decentralized currency of the future. Unlike traditional currencies, its price is not controlled by central banks as it is a peer-to-peer internet-based currency and is oblivious to the boundaries of countries. Bitcoin is a decentralized currency that is considered something of value in the digital space, just like gold, apart from the fact that its price fluctuates too much as compared to gold. As it carries value in the digital space, it is often termed as ‘digital gold’ by its proponents. It is only natural to draw a comparison between gold and bitcoin as they both represent value, but is bitcoin the digital gold and can it replace gold in the future?
The CEO and founder of Cryptobuyer, Jorge Farias, while talking to BlockPublisher, said:
“According to his initial conception, we believe that gold historically began to be valuable because people treasured it, then because of its decorative qualities and wealth demonstration, and nowadays even for its applications in technology and medicine. Bitcoin is seeing that same evolution and will eventually become a standard and benchmark measure”.
The world of cryptocurrency is still in its development phase. There are a lot of issues that are associated with the technology lying underneath bitcoin in terms of its scalability, privacy, etc. But as the technology goes through its evolutionary process, it is likely that bitcoin will become a standard in the crypto world as it is the biggest in terms of market capitalization right now.
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Even if bitcoin is able to gain a position in the financial world as the ‘digital gold’, its chances of replacing the physical gold are still going to be somewhat limited. There is every possibility that both bitcoin and gold can be used in conjunction in the future world. Stated by Professor François Longin from ESSEC Business School:
“Bitcoin can be considered as the new digital gold as it presents a low correlation during extremely volatile periods, especially stock market crashes. However, gold is still important for portfolio risk management. Actually, both Bitcoin and gold can be used together (in the same portfolio at the same time) to provide diversification benefit for investors”.
As hinted by Professor François, bitcoin can be thought of as the digital gold due to its similarity, but its usage in conjunction with actual gold by the investors is more probable in the future.
As opposed to the claims that bitcoin is the digital gold, there are still many issues associated with it that negate this position. Bitcoin’s price is highly dependent on speculation as there is no physical thing that gives it its value. As stated by an attorney and the chief executive officer of LegalAdvice.com, David Reischer:
“Bitcoin is not digital gold but is merely an digital ledger entry that tracks the transfer of the ‘digital entry’ on the block-chain ledger. There is no actual gold backing for any bitcoin. Gold trades at $1300 an ounce based on supply demand of the underlying commodity. Bitcoin trades based merely on speculators that attempt to guess whether the demand for a single Bitcoin will increase or decrease”.
Bitcoin’s transactions are recorded on a digital-ledger that is distributed, meaning everybody participating in the network has access to it. But the coin itself is just a digital entry and not a physical thing. Despite the similarities, lack of physical existence puts a question mark on the value of bitcoin.
It is too early to say anything regarding bitcoin’s role as the digital gold because of the volatility associated with it at the moment. But with the pace at which the crypto space is developing, the race of bitcoin becoming the future gold standard is on, knowingly or unknowingly. Having more gold signifies strong economic strength, but as bitcoin evolves, it is on its way to becoming future’s representative of economic strength.