Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Both gold and Bitcoin (BTC) have a history of being used as a currency. However, due to their limited supply, it seems they both thrive as a store of value (SoV). While a fiat currency can also function as a SoV, hyperinflation concerns are starting to push investors toward BTC, as a viable alternative to cumbersome and less ‘hip’ gold.
Gold Ushered Digital Money as a Safety Net
For ages, people sought ways to imbue money with a layer of future-proofing. Nobody wants to save money only to find it less valuable a year from now. For a time, tethering money to gold served this purpose, but eventually, fiat money and Modern Monetary Theory (MMT) prevailed.
Even the very first attempt at digital money, outside the blockchain, started with e-gold in 1996. These quite popular e-gold accounts were backed by gold coin deposits, while users traded via electronic P2P payments. With the establishment of Bitcoin, and thanks to blockchain, such projects became quickly obsolete.
Bitcoin mimics gold scarcity. Most importantly, it eschews cumbersome physicality and centralization.
Both would’ve made it easy for governments to shut it down, just like it happened with e-gold. As a result, we are finally entering the stage in which certain crypto-assets are valued more than gold assets.
DeFi Pushes Crypto-Assets Ahead of Gold
Thanks in large part to the volcanic emergence of decentralized finance (DeFi), crypto-assets are leaving the traditional gold in the dust. According to Bloomberg Galaxy Crypto Index, crypto-assets surged by 66% this year, just as wealthy crypto holders exploded the DeFi space by playing the role of virtual private banks.
In some respects, nothing could have been more predictable than the surge of DeFi — one of the few avenues left amidst chronically low interest rates and bond yields. Consequently, crypto-assets surpassed gold by over 20%.
However, this explosive expansion of DeFi is not a certain thing. Ethereum facilitates the DeFi space, but cracks are already starting to appear due to Ethereum’s lack of future-proofing. As DeFi locked-in crypto-assets continue to rise, currently just over $9 billion, the network congestion and fees will become more taxing.
In addition to DeFi becoming the hot new thing in the crypto space, many people find it hard to believe that the Federal Reserve can just magic into existence trillions of dollars without any consequences whatsoever. When such monetary happenings occurred in the past, and in many different nations, they usually resulted in hyperinflation.
Consequently, the perception of virtual vs traditional is teetering on the edge. It is difficult to gauge if another big swing in Bitcoin value would shake the confidence of the crypto sector and potential newcomers. Perhaps, as Bitcoin is viewed more as an SoV, most people would just take it in stride.
On the other end, it is much easier to open a crypto wallet and buy some virtual coins than it is to dabble in the highly regulated and controlled gold market. Moreover, institutional investors are showing a renewed wave of interest for the foreseeable future, with 90% of them expecting to invest in the crypto space.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.