- While bitcoin has been subject to the same criticisms that gold has endured – that it doesn’t do anything, pays no interest or dividends and doesn’t reflect the performance of the economy, it has been feted as a store of value.
- Both gold and bitcoin are also seen as protection against the systematic debasement of fiat currencies by governments and central banks, which tend to create progressively more supply.
Bitcoin maximalists are quick to point out how the cryptocurrency’s deflationary nature, make it akin to the role of gold in a portfolio, as store of value and as a hedge against inflation.
Consider that 2,000 years ago, the financial system consisted almost exclusively of gold – there were no stocks, no bonds or anything else by way of financialization outside of informal loans.
Raising armies and plundering neighboring countries revolved exclusively around gold and the ability to obtain it, secure it and better yet, coin it.
And for the next 2,000 years or so, finance was relatively straightforward, with the joint-stock company (a Dutch invention) coming around the 1600s.
Finance has only fairly recently become complex, with “simple” derivatives like futures and options morphing into things like credit-default swaps and collateralized debt obligations only crystalizing in the last two decades.
Dubbed “financialization,” these shifts underscore how paper wealth has played an increasingly larger role while hard assets such as gold, have taken a backseat.
While bitcoin has been subject to the same criticisms that gold has endured – that it doesn’t do anything, pays no interest or dividends and doesn’t reflect the performance of the economy, it has been feted as a store of value.
Just like gold, there’s a finite amount of bitcoin and it becomes progressively more difficult to mine over time.
Both gold and bitcoin are also seen as protection against the systematic debasement of fiat currencies by governments and central banks, which tend to create progressively more supply.
But it’s financialization where cryptocurrencies really stand out.
With cryptocurrencies just over a decade old, and whereas in the beginning there was only bitcoin, there are more cryptocurrencies doing different things today.
Some like ether, have cash flows and can potentially be valued on that basis and just like gold has in the past, the dominance of bitcoin relative to other cryptocurrencies will decline over time, the same way that gold has in the context of the broader financial market.
Novum Digital Asset Alpha is a digital asset quantitative trading firm.
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It does not constitute a recommendation or take into account the particular allocation objectives, financial conditions, or needs of specific individuals.
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