Gold vs. Bitcoin. Which Was Better Inflation Hedge?
Once upon a time, gold was a store of value.
Historically, investors have always turned to precious metals as a way to play rising inflation expectations. But over the last 12 months, holding bitcoin was a better decision over gold. Not to mention, it’s becoming increasingly clear that gold is seeing outflows while bitcoin is seeing inflows.
The nominal returns are shocking. For instance, Bitcoin is up nearly 330% over the last 12 months, while gold is down 10%.
The real returns are even worse.
US dollar got some of the highest inflation levels in years over the last 12 months. The official June CPI number was 5.4%, which is the highest in 13 years, and the core inflation number was 4.5%, which is the highest in 30 years. Given the inflation numbers, gold is actually down over 11%.Not exactly a great store of value, nor a safe haven asset.
So how did the gold perform so poorly during a higher inflation environment?
Analog vs. digital property
Both assets have sound money principles. They’re both outside the system and immune to any person or group creating more of the supply. However, we live in the digital age, and gold is the analog, and bitcoin is the digital application.
Just look at what happened to maps. Digital maps destroyed paper maps. You won’t find anybody in the world carrying paper maps anymore. Google maps disrupted them entirely. Music, photographs, or paper letters were all transformed similarly.
It’s essential to realize the digital property is the basis of the new digital economy. Gold has done a fantastic job for thousands of years but the old solution just doesn’t cut it anymore.
Change of the narrative
We may potentially be watching the destruction of the narrative in real-time. Investors don’t perceive gold as an inflation hedge. They decide not to vote for that narrative with their wallets any longer. Of course, it is too early to state the narrative to be dead, but it’s evident that gold’s market cap is materially shrinking as investors leave the analog store of value for the digital version.
Unlimited paper gold printing
Point often overlooked is there’s no universal protocol that links physical gold to paper gold. In other words, any bank or fund manager that holds physical gold can print as many paper gold derivatives as they want. For instance, a bank can print 10 or 20 or even as much as 100 times of its gold reserves. There is no integrity between the derivatives and the underlining asset.
Bitcoin is evolved gold
There is no way the 8 billion people will hold gold. That wouldn’t work. But it works with Bitcoin.
Blockchain technology has developed the idea of the store of value and fixed all the vulnerabilities of gold. When given the facts, it’s easy to realize that Bitcoin is 100 times better than gold.
Gold miners produce 2% more gold every year, but Bitcoin’s supply is capped at 21 million coins. Bitcoin is more divisible, you can verify it with your phone, and it can make a million transactions a second anywhere in the world. It’s programmable gold on a network.
And on top of that, it is decentralized with tens of thousands of computers running software simultaneously with an identical copy of the ledger. Therefore no government or bank can interfere.
As Michael Saylor put it, “Bitcoin is an apex property for the human race.”
Changing demographics
It’s important to realize that the entire demographic group of people below 35 now prefers owning bitcoin to gold. The possibility of trading and transferring an asset instantly on the phone without a third party tends to be more attractive to younger people. There are very few finance apps that integrate gold purchases. Needless to say, fintech companies never accepted gold into the mainstream world.
Final point
On the whole, the most compelling evidence against gold is its performance during high inflation levels of the past 12 months. Its failure as an inflation hedge is indefensible.
The market has always been the ultimate judge and jury.
