In the world of investors, Bitcoin is increasingly referred to as the replacement for gold. Gold has a fixed value. It is very expensive to mine new gold. It is therefore becoming increasingly scarce, as a result of which the value has sharply increased in recent years. Investing in gold means that your money will only increase in value. However, that scarcity is also a feature of Bitcoin. So it has been compared with gold recently.
This blog explains why Bitcoin is becoming a serious alternative for investors as a store of value for gold.
Why is the gold safe heaven for investors? And How Would Bitcoin Do the Same?
First a brief explanation of why investors need to invest their capital in gold. If the capital of large institutions is fixed in dollars, it is risky. The dollar is subject to exchange rate fluctuations, with the result that capital changes value from one moment to the next.
The value of the dollar is thus affected by inflation and other economic developments. A 20% drop in value in a very short time is not uncommon. Investors want to hedge that risk by committing capital in a more stable manner.
GOLD IS VALUABLE
Gold is a stable investment. It is a precious material, which cannot be easily mined. So a large stock of new gold will not be added so quickly. That means there is scarcity.
This scarcity causes demand to increase, keeping the price of gold high. In fact, if the demand is big enough, the price of gold will only rise. That also happened this year. Partly due to the worldwide inflation-promoting corona policy that is needed to limit the effects on the economy, gold has already appreciated 22 percent this year.
WHY DOES THE BITCOIN LOOK LIKE GOLD?
The similarity between gold and Bitcoin is that it is also scarce. That’s because the functioning of Bitcoin is based on the role that gold plays in the economy. Bitcoins are mined by so-called miners. These are people who solve mathematical problems with the help of computers. They are paid for this in Bitcoins. The Bitcoin design stipulates that a maximum of 21 million Bitcoins can be mined worldwide. That means scarcity is built into the design.
A measure that further stimulates scarcity is the so-called Bitcoin halving. That is, the total number of Bitcoins that can be mined is halved every four years. This is achieved by making it increasingly difficult for miners to mine new Bitcoins. The production of new Bitcoins therefore continues to decrease, so that inflation in Bitcoins is also becoming lower. Realize that more than 18 million Bitcoins have already been mined. The remaining stock thus decreases considerably.
There is a concept to indicate the ratio between the remaining inventory and new production. That’s the stock-to-flow ratio. At the beginning of 2020, Bitcoin was at 25, with an inflation of 3.6 percent. That was before the May 2020 Bitcoin halving.
Gold at the time had a stock-to-flow ratio of 62 and an inflation rate of about 2 percent. If the stock-to-flow ratio is higher and inflation rises, it will be more difficult to mine new Bitcoins and new gold. Then the scarcity rises.
During the development of the Bitcoin network, the underlying protocol has proven to be almost indestructible and very stable. Bitcoins can hardly be counterfeited. This has created a digital scarcity, which has led to the creation of a unique unadulterated preciousness.
This means that Bitcoin has the same properties as gold. One characteristic of gold is that it can be used for corruption through centralization of power. Bitcoin is insensitive to this due to the decentralized network.
Therefore, Bitcoin cannot be used as an instrument of corruption.
BITCOIN IS MORE POPULAR THROUGH PANDEMIC
The increased interest in Bitcoin as a store of value can be explained by the economic effects of the corona pandemic. As a result of the measures to limit the economic impact of the pandemic, inflation has increased.
Gold has benefited from this this year with a 22 percent appreciation. However, the Bitcoin appreciation in the same period is 140 percent. Mainly because of this, a large part of investors are interested in shifting part of their investments from gold to Bitcoin.