Gold or Bitcoin, which is better to hedge against inflation in 2022? As the investment world faces a clear and present danger that it has not addressed for decades: accelerating inflation, those seeking protection from this risk are now faced with a bewildering choice between the time-tested security of gold or bitcoin in the hype of its future.
There is a growing argument that the yellow metal and the original digital currencies, led by Bitcoin, share some key characteristics:
Both have the allure of rarity that has helped boost their value over the years. Gold is in limited supply and so is Bitcoin, whose new releases drop in the halving event that takes place roughly every four years and is expected to expire by 2140. They are also used as a medium of exchange, which means you can exchanging them for goods and services.
The debate over comparing investing in bitcoin to investing in gold is growing , especially after a report released earlier in November showed that inflation in the United States had reached its highest level in three decades, and the pace of inflation had accelerated across the eurozone, Canada and the United Kingdom. Also to reach levels not seen in a long time.
Gold prices have historically had a track record of performing well during periods of accelerating inflation, however, the performance of the precious metal this year pales in comparison to that of Bitcoin.
Speculation or store of value
It is not an easy choice for investors between gold and bitcoin, gold has been used as a store of value for thousands of years and has already succeeded, on the other hand, cryptocurrencies are currently being promoted as the future and a good store of value and are backed by celebrity influencers such as Tesla CEO Elon Musk “.
Even the US Securities and Exchange Commission, the market regulator, recently acknowledged Bitcoin's growing attractiveness to investors, with SEC Chairman Gary Gensler testifying before the US House of Representatives committee that Bitcoin is a highly speculative asset, but a store of value that people want to Invest in it as some might invest in gold
In fact, Bitcoin has significantly outperformed gold during 2022, despite the world's economies being hit by the worst inflation shock in a long time.
The leading cryptocurrency has surged more than 90% this year, hitting a new record near $69,000 in November before retreating to levels below $60,000, while gold bullion has lost about 5% of its value in the same period.
stability vs volatility
Gold not only plays its role as a hedge against high inflation but is also the best safe haven, meaning that it is one of the top assets that investors flock to buy during periods of heightened economic uncertainty, largely due to the precious metal's strong history of price stability.
Bullion continues to play an important role in the global economy, with central banks holding about a fifth of it to use as their reserves. What increases gold's appeal is the fact that it does not tarnish or erode, which enhances its usefulness in various industries including jewelry.
On the other hand, Bitcoin records rather poor results on the level of stability. The digital currency is characterized by its high volatility and low predictability like other digital currencies, and this feature was pointed out by many when criticizing the currency in its use as a hedge against inflation.
Bitcoin's volatility makes it a bad choice for portfolio diversification
The high volatility of cryptocurrencies makes them unsuitable for the three traditional uses of currency: as a store of value, as a unit of account, or as a medium of exchange.
Bitcoin has not displayed the characteristics of a safe asset like gold. Bitcoin is not issued or controlled by any entity, institution or government. This characteristic has allowed gold to act as a safe haven during some periods of heightened political and economic uncertainty.
Bitcoin has shown very unstable correlations with stocks and bonds, making it a poor choice for portfolio diversification.
gold standard
Gold was the basis of the monetary system known as the gold standard, which was used internationally from the 1870s to the early 1920s, Britain was the first to introduce this system in 1717, some of the drawbacks of pegging the currency to gold were the uneven distribution of the commodity and long-term price volatility In the short term, this method was eventually discontinued due to the volatility it caused.
Today, global central banks have mostly moved away from the gold standard, but still have gold bullion reserves held to be used as collateral for borrowing. The United States has the largest gold reserves at more than 8000 metric tons, followed by Germany with about 3,300, France and Italy with about 2,400.
In a 2020 survey conducted by the World Gold Council, central banks cited the main reason for holding their gold reserves due to the metal's performance during periods of economic crisis, along with its historical positions, this deep economic dependence on the metal may help secure its value in the long run.
Since 2014, gold has mostly underperformed stocks, while until recently Bitcoin has outperformed it.
Bitcoin Gaining Wider Acceptance
Since its creation in 2009 by an unknown person or group known as Satoshinakamoto, the attraction of Bitcoin has been the decentralization that can be exchanged on a peer-to-peer network without intermediaries.
The virtual currency is traded on an open source technology known as the blockchain, and bitcoins are distinguished by the fact that the number that can be created is limited, there can only be 21 million coins in circulation and it is estimated that this number will be reached in the year 2140.
The price of the digital currency soared to an all-time high in November after the launch of the first fund to trade on the US asset exchange: Procures Strategy.
Despite the growing acceptance of bitcoin in particular and cryptocurrencies in general, volatility, a lack of fundamental valuation, and an increased risk of market manipulation are the three concerns holding back the broader adoption of digital assets.
”Could Bitcoin Become a “Digital Reserve Asset
The question may be what prevents the process of converting bitcoin into a global reserve digital asset, it may be due to its extremely high volatility at the moment, however, the levels of demand, supply and dependence, and the decline in volatility paths indicate an increase in the depth and liquidity of the bitcoin currency to replace gold as a digital reserve asset, This means that we are already going down this path.
The Bitcoin mining method has been set up in such a way that the new supply of cryptocurrency roughly halves every four years, increasing its scarcity.