Bitcoin Vs. Gold – Is Bitcoin the New Gold 2.0?

This is an ongoing debate – Bitcoin Vs. Gold (2021).

And Is Bitcoin the New Gold?

Or as it is occasionally referred to as the Next Gold 2.0?

My view is that Bitcoin won’t replace Gold so easily. There is easily room for both. And Bitcoin might become more and more useful in times to come, but I don’t think it will replace gold in its entirety.

Gold has been here for thousands of years. And there must be some solid reason why it has survived for so long inspite of so many changes in our human civilization. So just because something new has come up that has similar characteristics as gold doesn’t mean the days of gold are over.

As my wife says, “I can’t wear Bitcoin around my neck, can I?”

That’s how she goes about comparing Gold to Bitcoin. But I have more interest in this discussion from an investment perspective. And jokes apart, I am not here to bash Bitcoin. I am a crypto-curious person who is trying to understand this new phenomenon. Still early days, But I am trying.

So let’s move ahead…

Number wise, how far is Bitcoin in its journey to become the new gold?

As of now, the market capitalization of Bitcoin is ranging currently in $600-700 Billion* (May-Jun 2021), which is 6-7% the size of the gold market cap (as per the general consensus about Gold market cap 2021 around $9-10 Trillion).

* At one point in the first half of 2021, the Bitcoin or BTC was $1 trillion and almost 10-12% of the size of Gold in the comparison of Bitcoin vs gold market cap.

I also feel that those who see Bitcoin completely replacing Gold misunderstand that the role of gold in our human society and not just the financial system. I like what is said in this article (link): I don’t know how Bitcoin will look in the future. What I can tell you though, with a good degree of confidence, is that gold will remain an asset that has a very unique set of properties through its dual nature and through its supply-and-demand dynamics, that make it useful for many investors, especially when they’re trying to hedge systemic risks.

No doubt many think of Bitcoins as their lottery ticket to a better and richer life. It’s like they want it to become a Bitcoin Crorepati.

As Winklevoss twins (the Billionaire crypto investors and from the Facebook origin controversy fame) say in their blog post titled “The Case for $500k Bitcoin” – “A lot of people are realizing that Bitcoin…..offers the opportunity for an asymmetric return of something like 25 to 40x from here, and I don’t think there’s an asset in the universe that can credibly offer that kind of potential and protect against inflation.”

I think this is the main reason why so many are getting attracted to Bitcoin and other Altcoins in reality. It is not about technological adoption or any other reason. Most common people just want to give it a go and try their luck. Maybe this approach will give way to more mature thinking in times to come. Let’s see and hope that happens. As that will eventually make Bitcoin a more reliable entity if I am allowed to call it that.

Though both Bitcoin and Gold don’t have the same longevity of track records, there is one thing that is common. Both aren’t controlled by the central banks or the governments. When people become worried about the financial or political systems that govern them, they look at gold as a safe haven. Interestingly, the birth of Bitcoin also came in the aftermath of the 2008 Financial Crisis, when not just investors and traders, but even the common man started to worry about the future of the global and national financial markets.

Another similarity is the scarcity of supply. Bitcoin has a maximum capacity of 21 million only. Ever. And that is expected to be reached by the year 2140. Gold on the other hand doesn’t have a preset or defined maximum capacity. But over the last decade or so, even with the improvement in mining and extraction technology, only 1-2% new gold is being added to the total stock of gold that has ever been mined.

That said, there might be hundreds of differences between Gold and Bitcoin. As my wife said – “Can I wear Bitcoin around my neck?”

A Forbes article (link) puts it aptly – Gold and Bitcoin represent different phases of how people think about ‘money.’ Gold was a currency for thousands of years, and it retains value in part by the psychological and historical attachment investors have to it. Bitcoin, along with blockchain technology, hopes to one day replace government currencies as the means by which people exchange payments….More broadly, investing in gold reaffirms your belief in the current international financial system, whereas Bitcoin is a bet that a more radical alternative is coming.

Another opinion piece (link) says – In many ways, Bitcoin and gold investors share similar views of the world. Both believe the dollar is at imminent risk of sharp and severe devaluation. Both see very strong inflationary forces, no longer just over the horizon but nearly everywhere around them. Both have very little confidence in the ability or willingness of governments to restrain those inflationary forces. Neither trust big government. In fact, both Bitcoin and gold afficionados believe that governments all over the world are actively stoking inflation as a means of indirect taxation and thus the confiscation of private wealth. In other words, both believe that fiat currencies – cash – are trash. Both see scarcity and limited supply as a key advantage of their preferred investment. 

Bitcoin vs Gold kind of debate is also something that I don’t currently subscribe to. It’s more of an ideological argument than a practical one. And the ‘old’ gold (or just Gold) still works just fine. I look at it as a safe portfolio hedge. It isn’t exactly expected (at least by me) to oscillate 20-40% on a daily basis. That is not what Gold’s role is in my portfolio. Should you have Gold in long term portfolio? Bitcoin on the other hand is more like a call option in the future. That too a one with asymmetric return potential.

There is another more angle to gold that most people won’t think about. As this Forbes article (link) quite interestingly states – “Then there’s Bitcoin’s reliance on the Internet. In an end-of-the-world-style financial apocalypse, individuals can still hold and trade physical gold. Try buying a loaf of bread with Bitcoin if the Internet stops working.”

Can Bitcoin Market Cap go higher than Gold? Yes, it’s possible. But it’s not a guarantee. In fact, comparing gold and Bitcoin’s market caps, there is a very interesting Bitcoin price prediction model named Bitcoin Stock-to-Flow Model being used by many crypto enthusiasts, traders, and Hodlers alike – This model has been popularized in the crypto space by an anonymous person named PlanB (Twitter link).

Here are 2 images that you will come across when you see this model

Bitcoin Stock to Flow Model Price prediction

Image source: Link

Bitcoin Vs Gold Stock to Flow Model

Image source: Interestingly from an article about why the model is wrong – Link

It gets a little bit technical but is still easy to understand. I won’t bore you with the details here unless you are really curious like I am. A good explanation is available here. But no doubt, the results of the model till now have been remarkably accurate in predicting Bitcoin’s price. And if the model remains accurate in years to come, then seemingly, there is a lot (and I mean huge) upside to Bitcoin’s market cap. I strongly suggest you check out this model in your spare time. You might increase your conviction about Bitcoin after that. By the way, there is no guarantee that the model will continue to work correctly forever. As it is said – All models are wrong, but some are useful.

So that is the Bitcoin vs Gold Stock-to-flow Model. By the way, this is an adaption of the original model for comparing Bitcoin and Gold. The actual model has been here for decades (link).

I know that given the past high returns offered by Bitcoin, you might get tempted. It does look lucrative and attract speculation in this asset. But these higher returns always come along with very high risk. How much risk? How about losing 80% or more in regular crashes? See for yourself in Bitcoin Crash History.

To be honest, I don’t think I am informed about Bitcoins to take a side strongly of Why is Bitcoin the new Gold Vs. Why Bitcoin Isn’t Gold 2.0? But as I said, I think Gold comes first in the portfolio. And if you understand what you are really getting into, then you can invest in Bitcoin. But I am still of the strong view that the core of your investment portfolio (95-99%) should be made up of assets like equity, debt, and gold. And since we are comparing gold with cryptos, it’s also worth mentioning that you don’t necessarily need to invest in physical gold (though some is recommended). You can very well use the various digital gold assets like Gold ETFs and Gold Bonds.

Further Reading 1 – What percentage % of portfolio to invest in Bitcoin?

Further Reading 2 – Should you Buy & Hold Bitcoin for 10 Years?

Further Reading 3 – Bitcoin Vs Ethereum: Which to choose?

As for Bitcoins and other cryptocurrencies, investing a small amount that you would not be worried to lose is fine. But you shouldn’t bet your entire savings on Bitcoin or other cryptocurrencies just because of its eye-popping returns in the recent past. I suggest you read this detailed note on Should I invest in Bitcoin? And if it calms your nerve a bit, then maybe you can consider doing monthly SIP in Bitcoin if lumpsum investing gives you jitters.

So that’s it. I think that Bitcoin won’t replace gold. Bitcoin is not gold 2.0. It is not meant to. Maybe Bitcoin will create a class of its own and go on to become a new kind of money that the world has never seen before. But I don’t think it will replace gold so easily. I may be wrong but that’s what I think as of now. Gold is a much more mature asset inspite of its occasional bouts of volatility. It’s battle-tested and has been here for thousands of years. When gold compared to Bitcoin, the fact is that till now, Bitcoin hasn’t yet really been tested, to be honest.

I hope you liked this long discussion about Bitcoin Vs Gold 2021 India useful. Is Bitcoin better than gold? Or is Gold better than Bitcoin? Or is Bitcoin the 21st-century gold? Only time will tell.

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