There will be a lot of ways to describe 2024 for crypto wallet holders, but it all goes to show what a difference just a year makes.
From a low of under $20,000 in mid-2022, Bitcoin has rallied to close to $100,000 in late November 2024, due to a range of causes from increased attention from a range of investment sectors, spot Bitcoin ETFs and both policies and regulations that help boost trust and confidence in the sector.
A lot has been said about this current state of events and what it means for the financial sector as a whole, let alone the decentralised finance sector.
However, one of the more interesting parts of the article published by The Independent was a comment by Nigel Green of the deVere Group, a financial advisor.
He claimed that the overarching narrative of Bitcoin is that it is “digital gold”, and whilst there is a vested interest in ensuring interest and investment in crypto remains at sky-high levels, this does pose an interesting question.
Is Bitcoin and/or other cryptocurrencies digital gold? There is a very simple answer and one that is more complex but gets to the heart of how crypto is used in the 2020s and how it differs from its use in the 2010s.
What Do Crypto Investors Mean By Digital Gold?
The simplest answer is that it is not. Digital gold is a specific form of electronic currency that, unlike cryptocurrency, is a representative form of money.
Cryptocurrencies do not necessarily have to be backed by anything in order to have their value,
whilst digital gold currencies are generally backed by an equivalent amount of real gold, and digital gold currencies can typically be exchanged for an amount of gold on request, typically supplied in grams or ounces.
However, when economists, investors and crypto evangelists describe Bitcoin as digital gold, they are typically not talking literally, but instead are referring to how Bitcoin is an asset that acts like gold in financial markets.
Following the discontinuation of the gold standard, where units of currency are pegged to the value of a fixed amount of gold, precious metals markets have often formed a parallel, sometimes volatile, market compared to forex and currency values in general.
The relationship it has with the floating exchange rates of currencies in general and the United States dollar, in particular, is typically to serve as a natural hedge. Whenever the dollar increases in value, gold prices tend to fall as traders move into forex.
Conversely, when the value of currencies fall, typically as a result of inflation or a financial crisis, most investments move into gold and gold derivatives as a way to insulate portfolios against the effects of market meltdowns.
The claim, therefore, is not that Bitcoin and other cryptocurrencies are a commodities asset or a digital currency with a value directly pegged to the value of a particular asset, but instead are an asset class that acts in the same way as gold in the market and insulates against inflation.
This is not a new claim in the slightest, and arguably the creation of Bitcoin in 2009 came as a result of the desire to have an accessible currency independent from the financial and banking systems blamed for the Great Recession.
However, whether this was the plan or otherwise, Bitcoin emerged not as an alternative currency or a form of natural hedge, but instead as a financial instrument, and this is where the serious questions lie about crypto’s future as a natural hedge.
Whilst the value of gold fluctuates, its behaviour is seen as relatively predictable, with clear boundaries when it comes to both floor and ceiling. Its value on the commodities market will always be tied to the intrinsic value of the shiny yellow material itself.
This is also true for digital gold currencies such as DigiGold, a digital gold currency operated by The Royal Mint, the literal money printer in the United Kingdom. Digital gold can be exchanged for physical gold, with a value linked to the intrinsic value of the material itself.
This is true for other commodities, particularly when bought as futures.
By contrast, whilst Bitcoin has a fixed limit to the number of Bitcoins that can be mined thanks to the 21m hard cap, can it necessarily be said to have the same type of intrinsic value and act as the same natural hedge?
In some ways it might; if there is a major recession, inflation spike or currency crisis, money might move into Bitcoin the same way it moves into gold, it is also at present a very volatile speculative asset.
Ironically, if Bitcoin were to become more like gold, it would potentially be less desirable for investors as the potential for prices to skyrocket further would not be there in the same way they are now.