Beating Bullion: Will Bitcoin Eventually Replace Gold?

Bitcoin can rarely keep out of the spotlight at the moment, and following a powerful end to 2020 where the world’s largest cryptocurrency repeatedly beat its all-time high price, the coin has begun to spark debate over its suitability as an eventual replacement for gold as a store of value. 

However, opinions remain divided over the suitability of crypto as an avenue for maintaining wealth in a similar way to that of precious metals.

Source: Coingecko

As the chart above shows, Bitcoin has grown from humble origins just a decade ago into a phenomenon. Although it’s characterised by severe market volatility, the future looks bright for the cryptocurrency as higher adoption levels appear to point to higher future prices while crypto exchanges continually develop stronger features in terms of security and usability for investors. 

Source: BullionVault

Although less volatile than Bitcoin, we can see that the value of gold has also climbed steadily over recent years, albeit nowhere near the same rate as BTC. 

Let’s take a closer look at what the future could hold for Bitcoin investment, and whether it really has the potential to replace gold as a favoured storage of value:

Bitcoin Building Momentum

Bitcoin is causing plenty of excitement among investors and market analysts alike. Rick Rieder, BlackRock’s chief investment officer of fixed income is upbeat about Bitcoin’s future position in the world of finance, and claimed in late 2020 in a CNBC interview that the cryptocurrency ‘is here to stay.’

While this endorsement from BlackRock, a New York-based global investment management firm with almost $8 trillion in assets under management comes as the most recent sign of validation for the cryptocurrency, other firms are also piling into the Bitcoin hype. 

Some strategists point to the interest of some of the worlds biggest asset management firms, including JPMorgan Chase as an indicator that there’s strong potential for Bitcoin to one day replace gold as the go-to safe-haven investment choice. 

ABC Money points to an already emerging trend where company treasury allocations are beginning to move towards Bitcoin. MicroStrategy and Square are two notable examples of this, with the former initially investing $425 million in Bitcoin before announcing a $400 million convertible bond offering where proceeds would go into BTC purchases. Due to overwhelming demand, the offering was subsequently scaled up to $550 million in a matter of days. 

When it comes to corporate treasuries BTC may be one of the few good investment ideas out there. Government and corporate bonds yield very little in comparison, with yielding debt at an all-time high. Elsewhere, cash is losing purchasing power owing to inflation. However, the volatility that formerly scared investors away from Bitcoin and crypto purchases has fallen to an all-time low in relation to gold. 

Over the coming years, it may be the case that Bitcoin will gradually eat into the market share of gold as the go-to safe haven and store of wealth asset. Due to its mathematically defined and verifiable scarcity and network metrics surrounding hashing power and active accounts, could bring greater appeal for investors. 

Furthermore, with the cryptocurrency’s relatively small market capitalization, and accelerating adoption rates across the board, Bitcoin could offer some attractive risk-reward benefits for investors. 

The Difficulty of Imitating Gold

Despite Bitcoin’s surging popularity, there are still some stark contrasts between the cryptocurrency and gold. One of the biggest differences comes in the form of the wildly different use cases between BTC and gold. 

While both Bitcoin and gold can be regarded as stores of value, gold has practical use cases when it comes to the production of jewellery and the manufacturing of goods in electronics and motoring industries among others. 

Despite Bitcoin operating on blockchain technology, its infrastructure is more rudimentary than other blockchain networks that can be found on Ethereum and other altcoins, meaning that, practically speaking, gold outmanoeuvred the coin when it comes to usage. 

 Is The Lure of Bitcoin Strong Enough?

Towards the end of 2020, market movements seemed to suggest that more money was beginning to flow from gold and into digital assets. In November, gold prices fell 5% on the day of the announcement that a Covid vaccine had been developed with a 90% efficacy rate. The news caused Bitcoin, however, to rise by 2%. In the days and weeks that followed, more money left gold and entered into the cryptocurrency markets. 

If money is leaving gold and going into Bitcoin, it may be down to more optimism in the economy for jumping into ‘risk-on’ trades within stocks and cryptocurrencies. While this doesn’t make Bitcoin a safe-haven play like some analysts suggest, there’s a chance that it shows a clear sign that investors are waking up to the potential of a coin that’s shedding its volatility and winning suitors all around the world.