Why Has Bitcoin Earned a Reputation as Digital Gold?
If you’ve been paying the remotest kind of attention to the cryptocurrency space, or to Bitcoin in particular, then you might have seen it lauded as a kind of digital alternative to gold. This narrative, while imperfect, has gained considerable traction within the BTC community. But exactly where does it come from, and why might it be misleading?
Understanding the Idea of Digital Gold
Bitcoin is similar to gold in a number of important respects. Firstly, it’s scarce by design. The protocol limits the total number of coins to around 21 million. Second, it’s not controlled by any central authority. Bitcoin is seen as a safe haven, much like gold, when the global economic outlook is uncertain. It’s a hedge against the instability, and inflation, inherent in traditional forms of money.
The Role of Scarcity
It’s worth focusing on one specific aspect of Bitcoin: the scarcity. The supply currently sits at around 95% of the eventual total. We can be sure of the precise pace at which new coins are created, because it’s controlled through a process known as block reward halving. The more coins there are, the less incentive there is for new blocks to be created.
This scarcity helps to ensure that the price of the commodity isn’t going to be undermined by the arbitrary expansion of supply. This is a danger associated with any currency controlled by a central bank.
Why Investors Continue to Watch Bitcoin
Bitcoin was, to begin with, a mere curiosity. But it’s since become a staple in the world of investment. Bitcoin attracts investment when interest rates are lower, and when liquidity is tighter. Investment in Bitcoin is perhaps more straightforward than it ever has been, thanks to accessible applications and other platforms. It might be that there’s a Bitcoin ATM near you, at which you can buy and sell your coins.
We should also be aware of some of the psychological factors that might lead to Bitcoin being over- or undervalued. Media hype, for example, can create spikes in value.
Where Bitcoin and Gold Differ
We’ve looked at some of the similarities between bitcoin and gold. But at the same time, there are a number of important differences to be aware of.
Bitcoin is vastly more volatile than gold, and prone to sudden and severe swings in price. Gold has a much longer track record, and it can be used in products like jewellery and electronics. Finally, we should be aware of the security challenges of Bitcoin, and the need for investors to educate themselves.
Could Bitcoin Continue to Earn This Reputation?
As Bitcoin grows in popularity, and investors become more educated, it’s likely that some of the nuances that surround this comparison will become more widely known. All investment involves a degree of risk, and good investors make it their business to understand and control for that risk. If you’re looking to get into Bitcoin, this should be a priority for you!
