Bitcoin vs. Gold: Which is a Better Investment?

During the last decade, Bitcoin (BTC -0.14%) has thrust itself into the spotlight as the premier cryptocurrency. Along the way, several narratives have emerged to justify an investment in Bitcoin. One of these is that it is like “digital gold” because, like gold, it can act as a store of value and a hedge against inflation.

So if Bitcoin is basically digital gold, which is the best investment?

Image source: Getty Images.

The story of the tape

To start, let’s talk about the concept of a store of value. A store of value is an asset that preserves wealth and acts as a hedge against economic downturns and inflation, with the expectation that it will also strengthen over time. Gold has long been considered to meet this criterion.

When we compare the price of both since Bitcoin was created in 2009, it becomes clear that while gold does a fair job of preserving wealth, it doesn’t come close to the combination Bitcoin provides of preservation and is growing wealth.

What the numbers say

Since 2009, the inflation-adjusted return on gold has been approx. 3.3%, and the total return has been approx. 57%. Over the same period, Bitcoin has an inflation-adjusted annual return of nearly 145% and a total return of 33,983,965%.

Now there is clearly a flaw in this comparison because gold has been around for millennia and Bitcoin has only been around for 14 years. So let’s take it further back.

Since 1980, gold’s performance has been weak, generating an annual return of 3.1% before inflation. After accounting for 40 years of inflation, gold returned an unappetizing annual return of -0.24% and a total return of -10.1%.

From this angle, it becomes clear that not only does Bitcoin outperform gold in preserving wealth as a store of value and as a hedge against inflation, it also does an excellent job of increasing wealth.

Why Bitcoin?

But to truly understand how Bitcoin has risen to this level, it helps to understand how it enhances some of the primary characteristics that originally made gold attractive to investors.

Bitcoin and gold both exist in limited quantities. But Bitcoin takes this a step further. While gold is finite in the sense that it is a physical resource that must be mined, its supply is not fixed and can fluctuate based on mining activity and new discoveries. However, Bitcoin’s supply is set at 21 million coins, and new coins will gradually enter circulation at a decreasing rate until the year 2140, when the last Bitcoin will be mined.

Another advantage of Bitcoin over gold is its portability and ease of transfer. Bitcoin can be sent anywhere in the world within minutes, without the need for intermediaries such as banks or payment processors. All you need is an internet connection.

Additionally, Bitcoin has a high degree of divisibility, with each coin divisible into 100 million satoshis. This makes it easier to use Bitcoin as a medium of exchange for small transactions, which is not as feasible with gold. While Bitcoin as a form of currency has not quite materialized as some might hope, progress is being made thanks to the growing use of payment solutions such as the Lightning Network.

Finally, it is worth mentioning the technological advances that Bitcoin represents. Bitcoin is built on blockchain technology, a decentralized digital ledger that is immutable and transparent. This means that every transaction that takes place on the Bitcoin network is verified and recorded on the blockchain, making it virtually impossible for anyone to change or manipulate the data. This level of transparency and security is unprecedented in the financial world and represents a significant leap forward.

Consider these additional attributes and the simple fact that Bitcoin has recently dominated gold in terms of its performance as a store of value and inflation hedge, and it becomes clear that an investment in Bitcoin today can prove valuable. In an increasingly digital world, and as the need for alternatives to inflation-prone fiat currencies persists, Bitcoin is in a unique position to benefit for decades to come as increased demand bumps up against its limited supply.