Will bitcoin become the new digital gold?

Both assets have similar investment characteristics

Tom Eckett

a stack of gold bars

The similarities between bitcoin and gold are difficult to ignore. Both are viewed – rightly or wrongly – as a natural hedge against inflation, there is a finite amount of both, they usually have relatively low correlations to equities and fixed income and they act as a store of value outside of traditional systems such as governments or central banks.

What is crucial is their respective role within a diversified multi-asset portfolio. Many proponents of cryptocurrencies vehemently believe bitcoin will replace gold as the ultimate store of value over the next decade.

As MicroStrategy CEO and bitcoin bull Michael Saylor said last year: “It is pretty clear digital gold is going to replace gold this decade.”

However, it is not just the crypto fanatics that are bullish on the prospects of bitcoin upending gold as the leading alternative safe-haven investment. In a research note at the start of the year, Zach Pandl, co-head of foreign exchange strategy at Goldman Sachs, said the largest cryptocurrency could continue to take market share away from gold this year.

“Bitcoin may have applications beyond simply a ‘store of value’ – and digital asset markets are much bigger than bitcoin – but we think that comparing its market capitalisation to gold can help put parameters on plausible outcomes for bitcoin returns,” he said.

Along with bitcoin increasingly being viewed as a store of value, its role as a hedge against inflation is also touted. While gold is traditionally viewed as one of the best hedges against inflation – largely due to its performance during the 1970s and 1980s, bitcoin has never seen an inflationary environment, except for the one we are currently in.

Its limited supply of 21 million coins is cited as a key reason why it should be a strong hedge against inflation. Bitcoin cannot be devalued by a government or central bank, unlike the US dollar, for example.

As JP Morgan said in a research note: “The re-emergence of inflation concerns among investors has renewed interest in the usage of bitcoin as an inflation hedge. Institutional investors appear to be returning to bitcoin, perhaps seeing it as a better inflation hedge than gold.”

However, the digital asset is yet to prove its worth as Man Group’s Henry Neville explained: “This scarcity has some similarities to the scarcity of gold, given the limited amount of newly mined gold that comes to market each year.

“Some have advocated the inclusion of bitcoin into a diversified portfolio as an inflation protection asset. However, caution is warranted given that bitcoin is untested with only eight years of quality data – over a period that lacks a single inflationary regime.”

While more historical data is needed to see how bitcoin behaves in different inflationary environments to pass judgement on its role as a natural hedge, the idea of bitcoin as a store of value is powerful.

Both bitcoin and gold lack any intrinsic value which leads to the view the former could replace the precious metal as markets becomes increasingly digitalised. As Warren Buffett once famously said: “[Gold] has no utility.”

Echoing Buffett’s comment, a recent research note from Robeco pointed to the lack of history as one of the major points against bitcoin versus a commodity such as gold. “Just like gold, bitcoin is scarce and durable. In addition, bitcoin exhibits high portability, is easily transactable and programmable. What it lacks relative to gold, of course, is a long history of being perceived as a store of value.”

As the crypto market matures and volatility dampens, there is no reason why investors should not look to bitcoin as a means of value storage. However, gold and bitcoin can behave very differently during market cycles so do not expect the precious metal to be going away anytime soon.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

'Is bitcoin the new digital gold?' is the panel title of ETF Stream's Crypto 2025 event on 9 March. To watch live, sign up here.

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