Store of Value: Why Crypto Won’t Replace Gold
As big names from Elon Musk to the Bank of New York Mellon dive into Bitcoin, people are throwing around the term “digital gold” to describe cryptocurrencies.
The Bank of Singapore went straight to the point when it claimed that cryptocurrencies could replace gold as a store of value. But this comparison is highly flawed, and risks misleading regular citizens into placing their trust in an asset that is still highly unstable and could rapidly deplete their savings.
First, let’s talk about gold. Gold is considered a strong store of value because its physical properties and scarce supply mean that its value stays consistent over time. Cryptocurrencies, on the other hand, are extremely volatile and can be made on demand (there's a potentially infinite supply) — so they do not hold their value. Those unpredictable spikes and tumbles are one of the reasons we can’t actually talk about cryptocurrencies as an everyday form of money. Indeed, we should treat them as risky investments.
Gold has been used as money for millennia and has intrinsic value. Not only is gold not comparable to cryptocurrencies, it’s also under no threat of having to compete with them. Here’s why.
Pitfalls in Crypto Infrastructure Can’t Be Fixed
Many cryptocurrencies function using blockchain technology: decentralized systems that track the exchange of digital assets. As sophisticated as the tech is, augmentations to infrastructure — in the name of improving scalability — have given way to vulnerabilities.
To handle global demand, Bitcoin relies on off-chain transactions, where users buy and sell coins outside of its blockchain network, essentially undermining the entire reason for using the technology in the first place. While off-chain transactions are supposed to be a way around blockchain’s constraints, they actually create security and verifiability vulnerabilities as they can be manipulated before being written back into the blockchain, opening doors for foul play with people’s money.
Processing blockchain transactions for Bitcoin exchanges is also highly inefficient and consumes huge amounts of time and energy. In fact, earlier this year it was revealed that Bitcoin uses more electricity annually than all of Argentina. Despite the vast energy uptake, fewer than 10 transactions are written to a Blockchain per second, with critics accusing crypto miners of reckless environmental damage for a purely speculative asset. As one crypto author analyst told Yahoo Finance, “All this energy is being literally wasted in a lottery.”
Gold, however, is an international commodity that can be safely purchased through a variety of channels — and in different forms. Access to gold doesn’t depend on a technological backbone, and because it’s so established, there have been regulations in place for decades to protect how it’s sold, stored and spent.
Cryptocurrencies Won’t Necessarily Be Immune to Inflation
Any asset that is subject to severe inflation can’t be deemed a good store of value. Inflation dilutes the value of currency when there is an increase in its supply — something that happens with cryptocurrencies regularly, as they can be created at whim. The sudden expansion of crypto pools essentially erodes their worth. Purchasing power drops and holders need more to buy the same amount of goods. In response, some cryptocurrencies developers have taken to “burning” coins (sending usable tokens to an unusable account) in attempts to reduce the available supply, but this won’t necessarily outweigh the scale of coin production.
Currently, the Fed is collaborating with other nations in investigating the development of central bank digital currencies (CBDCs) like that issued in China. The idea is that CBDCs will be hybrid “stablecoins,” meaning they will be pegged to fiat currencies (like, for example, Facebook’s Diem). However, if these hybrid coins are composed of fiat currencies that are subject to inflation, that same inflation would directly impact the value of the stablecoin. All in all, there is yet to be a clear way to utilize cryptocurrencies outside of the influence of inflation.
Meanwhile, gold isn’t impacted by inflation; its price typically goes up during times of inflation as investors rush to the precious metal as a safe haven.
Instability Is an Inherent Part of the Crypto World
Unlike gold, cryptocurrencies have no intrinsic value. They don’t have any purpose other than being means of exchange. And because they’re treated like investment assets — with anyone from casual investors to institutional investors seeing what returns they can get by dabbling in crypto — they remain highly volatile, soaring when it’s in fashion and precipitating when people cash in on their investment. For example, Bitcoin halved in price between February and March last year, doubled by the end of the year, hit record highs this January, and then dropped 15 percent only a short time later. By comparison, physical gold is everywhere: in medical equipment, electronic devices, jewelry and more. That means there is always steady demand for the precious metal, keeping the price of gold relatively consistent.
Perhaps one of the biggest hindrances to cryptocurrencies is this paradox: People buy cryptocoins, but they don’t use them because they want their value to grow. However, unless crypto is used to serve its purpose as a means of exchange, its value will eventually fall, and investors will offload it. This cycle is why some economists predict that cryptocurrencies will, sooner or later, return to a value of zero — because crypto cannot sustain its functionality. On the contrary, there’s no sign of gold ever dropping to a value of zero. It has too many uses, it has a finite supply, and its physical supply can’t be manipulated.
Gold has been around for centuries, outlasting failed fiat currencies and persevering through global market crashes, while crypto is precarious and in its infancy. When a form of “money” has no intrinsic value and exposes people to dizzying fluctuation, it can never match gold’s reliability. So while pro-crypto players will naturally push it as the new gold, crypto is closer to fool’s gold than the precious metal, and its bubble will most likely burst in the coming years.