Could Bitcoin Replace Gold in The Future?

In the near term, Bitcoin will remain a speculative digital asset. However, specific indicators point towards a probability of it becoming a “digital gold” in the future.

A digital currency system called E-gold was created in 1996 by attorneys Barry Downey and Douglas Jackson, an oncologist. It was the first digital gold currency backed by physical gold stored in the company’s vault. The system allowed users to own actual gold in the form of a digital currency and enabled them to make instant private payments to other e-gold accounts. Unfortunately, it was shut down by federal law enforcement agencies in 2009 due to regulatory concerns. Coincidentally, the revolutionary blockchain and its reward token, Bitcoin, was invented during the same period as e-gold’s demise. Since then, Bitcoin has been labeled by investors worldwide as a potential “digital gold,” which might replace physical gold as the preferred store-of-value asset in the decades following the first minted Bitcoins in January 2009.

Describing Bitcoin as “digital gold” can be a convenient way of explaining its concept that attracted buyers to Bitcoin, giving the first cryptocurrency a real-world value. The globally recognized digital asset has strikingly similar characteristics to physical gold, as both purchases are limited in supply and inimitable, not controlled by a single authority, and fungible. Unlike e-gold, Bitcoin is decentralized, while e-gold is a centrally controlled system with a single point of failure in the event of a company fallout. However, it remains to be seen whether or not Bitcoin can stand the test of time and prevail upon the global financial market as the replacement for gold and as the store of value for the digital era.

In March 2020, Bitcoin experienced extreme volatility, which capitulated traders who entered the market in January and February of the same year. However, evidence suggests that traders with substantial amounts of capital, or whales, have seen the massive price dip as a buying opportunity for Bitcoin, reigniting the narrative of Bitcoin as digital gold.

Anticipation for the digital gold

The underlying blockchain technology and cryptocurrencies have increased interest from governments, corporations, and financial institutions. Countries like China have acknowledged the valuable technology and are using it to create national digital currencies. Likewise, droves of famed corporations, including Microsoft, IBM, and Google, have embraced blockchain and integrated the technology into their business operations and products. As a result, cryptocurrency has become an attractive digital asset for retail and institutional investors in recent years, and Bitcoin has managed to maintain its dominance in the cryptocurrency market. Additionally, many experts believe that cryptocurrency banking may emerge as an indispensable part of the financial market due to the maturing cryptocurrency market. Crypto banking is a strong contender to traditional banking systems due to its decentralized system, offering a more efficient, transparent, and secure method for the people.

The imminent rise of Bitcoin

A recent study by US-based cryptocurrency exchange Coinbase mentioned that the market capitalization and demand for gold are linked to its supply scarcity. Armed with a multitude of technological advantages, accelerating development, and maturing the global market, Bitcoin is a strong contender for gold as the preferred store of value. The market value of Bitcoin has grown exponentially since 2013 and has experienced a handful of significant rallies brought about by the first two Bitcoin halving events, in 2012 and 2016, respectively. The Havening, or Bitcoin halving event, occurs when the reward for the mined blocks on the blockchain is halved, further slowing the production rate of the 21 million Bitcoin supply. After the third halving event in May 2020, the coin’s production rate will split every 210,000 blocks until 21 million Bitcoins are thoroughly mined, 120 years from the time of this writing.

On the contrary, the supply of gold may increase over the next century, owing to the technological advancement in asteroid mining. In 2017, NASA announced they plan to visit Asteroid 16 Psyche, made of gold and other precious metals, including gold. If mining on an asteroid is possible, Asteroids like 16 Psyche will be worth a whopping US$10,000 quadrillion dollars. While this may seem like a far-fetched idea in 2020, Bitcoin, on the other hand, has an unalterable total supply deeply programmed into Bitcoin’s immutable blockchain.

Bitcoin and Gold’s History as a Hedge

In 560 BC, the Greek state of Lydia in Asia Minor introduced the first gold coins as a medium of exchange. For about two millennia, the gold standard was recognized globally as a reliable form of money, and national currencies of many countries were pegged to gold until 1971 when US-pegged national currencies became the norm. However, various financial crises have cast doubts over their currency’s over-reliance on the US Dollar. Bitcoin was created based on this concern when the Bitcoin creator Satoshi Nakamoto felt that central authorities should not control the people’s money. In the 2008 financial crisis, companies and individuals were gravely affected by big banks due to their risk mismanagement amid the economic downturn.

However, Bitcoin is designed to hedge against authoritarianism, not monetary manipulation. Unlike physical assets like gold, which is susceptible to civil forfeiture, it offers a well-built resistance to governments. Bitcoin, as an asset class, was created to counter the government’s pervasive control over the people’s assets and has proven itself useful in geopolitical turmoils.

Added Privacy Layers in Bitcoin

Bitcoin is an intangible asset that can be traded easily within minutes in a cryptocurrency market that operates around the clock, anywhere in the world. Scarcity and ease of transfer make Bitcoin a great store of value. With the help of available privacy tools in the cryptocurrency market, the pseudonymous digital store of assets could also conceal the identity and personal information of the holder, unlike gold, which most often requires a declaration of information to authorities.

Although there are privacy-focused cryptocurrencies such as Monero, which offer obfuscation of the user’s data and identity, Bitcoin dominance has garnered a comprehensive support ecosystem enhancing this asset class. Known as Bitcoin mixer, the third-party privacy tool enables the holder an added level of anonymity and privacy, often more secure than privacy coins like Monero. With an increasing number of people purchasing Bitcoin, the traction of Bitcoin mixing services has grown in tandem with the cryptocurrency. Bitcoin mixer ensures complete anonymity for the investor, further cementing the potential role of Bitcoin as the preferred store of value in the following years.

A Bitcoin mixer is a user-friendly automated platform that provides a seamless and secure environment, removing traces of the investor’s transaction with Bitcoin through the randomization of the Bitcoins sent to the Bitcoin mixer and received into the user’s receiving Bitcoin address. Most reputable Bitcoin tumblers do not keep any logs or personal information of the user since no account is required for the Bitcoin mixing service. On the other hand, a report is required for storing the physical gold asset and is subjected to unwarranted intrusion of the investor’s privacy.

Bitcoin as a Safe Haven Asset

Michael Sonnenshein, the Managing Director at Grayscale Investments, announced in November 2019 that the US Securities and Exchange Commission (SEC) has recognized the Grayscale Bitcoin Trust as a reporting company, which holds an estimated 1.7% of the total Bitcoin supply. According to Sonnenshein, the decision signals progress in the crypto market, where regulators are no longer conservative and are willing to engage with the digital currency asset class. Bitcoin’s growing status as a haven asset may also be seen in countries like Venezuela and Iran, where economic turmoil impacted their national currency, forcing their citizens to look for Bitcoin as a haven. Reputable peer-to-peer Bitcoin marketplaces such as LocalBitcoins and LocalCryptos saw a high trading volume of Bitcoin in affected countries like the above.

Beyond Digital Gold

The world is now facing challenges such as the coronavirus pandemic, oil price wars, and a large-scale global recession not seen since the last world war. Should Bitcoin become significant enough in the market to prove its viable alternative to gold and the traditional financial system, it will evolve beyond a hedge against the longstanding haven asset, gold. Every application built around Bitcoin provides an alternative for consumers and enhances one’s anonymity through third-party privacy tools like a Bitcoin mixer. The current year may be a monumental year for people to realize the flaw in the unscrupulous centralized financial system. Gold and Bitcoin will likely coexist in the foreseeable future. Beyond that, the function of Bitcoin may far exceed that of gold, introducing a new concept of money that we have never seen before.