There is a story that says that Bitcoin is a major hedge against inflation like gold.
That may be true, but there is a bit of evidence behind the claim.
Bitcoin is distinguished from gold in at least three ways.
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Bitcoin (Cryptography: BTC) As you’ve heard, it’s often called by the catchy moniker “digital gold.”
However, there are some important differences between Bitcoin and Real Gold that have long been used as a hedge against valuable stores and inflation. Here are three of the most important things you need to know.
To be a hedge against inflation, just like Bitcoin buys gold, it must maintain its purchasing power in Fiat currency over time. This way, as Fiat currency becomes increasingly devalued, the holder can purchase the same amount of goods and services when it decides to convert the coin into Fiat.
Consider this chart:
US Consumer Price Index: YCHARTS’ Purchasing Power of Consumer Dollar Data
At first glance, Bitcoin actually looks better than gold when it comes to retaining value against a drop in value over the last five years. But this is a bit deceptive.
Gold has been used as a valuable store for thousands of years. Its rarity is well established. If you really want, you can create a chart of its value over time covering a longer period than any Fiat currency that currently exists and can be exchanged for it. And the chart is ironic evidence that gold is a great inflation hedge, as it literally holds its value to points that exceed many ranges than its worthy storage.
Bitcoin has no history of use. It was released only in 2009. The idea that it is worth a totally serious amount is even more recent than that. And while its supply is finite, there may be only 21 million coins in total, but it doesn’t last longer than any of the exchangeable Fiat currencies. Therefore, even if it exceeds gold, it has not been proven to protect against purchasing power erosion caused by inflation.
Image source: Getty Images.
Gold is an important metal used in home appliances, scientific equipment, gemstones, and even some foods and liquors, but it is not very tasty for these uses. It is also very shiny, and by knowing human psychology, it makes people want to own it.
But Bitcoin can’t be used for anything other than storing value. There is no industrial process that requires it. It is not a component of the physical thing you use. And because it’s digital, it’s difficult to show off to others.
The story continues
So, like gold, Bitcoin has no utility values. It is not a problem that prevents investors from protecting the effects of inflation, but it suggests that when the shortage of tangible commodities becomes a real problem, gold may be better as it is not a product necessary for production.
Over the past decade, Bitcoin has mostly risen, except for a few times that lost about 80% of its value, and a few times that lost about 40% of its value. It is volatile. And for a value store that aims to maintain purchasing power over time, it is a scary attribute to have, as it means that the value of your assets is not anywhere in the month or two before it occurred when the opportunity arises that you need to use to pay for a purchase.
Gold prices have also risen over the same period. But what it’s not doing in modern times is the experience correction, which is as sharp as Bitcoin. It also does not suggest that its prices are completely upwardly mobile. Its long term of value remains relatively static or is lower than during that boom period. The point is, on average, you are likely to expect most of its value to be around when you need it.
Technically, bitcoin volatility could eventually decrease somewhat due to more supply mining, leading to more supply concentrating in the hands of sovereign actors and corporations’ Treasury Department, who are not as likely to sell their holdings as they are widely distributed owner bases. Still, expect it to be far more volatile than gold until there is evidence that it is happening. It is much more volatile than assets such as stocks and real estate.
Consider this before purchasing inventory with Bitcoin.
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Alex Carchidi has a Bitcoin position. Motley Fool has a position and recommends Bitcoin. Motley Fools have a disclosure policy.
Is Bitcoin really “digital gold”? Three ways major cryptocurrencies can branch with the most popular inflation hedges and the most popular ones were originally published by The Motley Fool
