Why crypto is called a digital gold

Is cryptocurrency the new gold? The idea of the commonality of these investment assets was expressed for the first time in the report of the largest US bank, JPMorgan, in October 2020. The bankers then accepted the fact that gold and cryptocurrencies started to compete with one another on the financial market. At the same time, JPMorgan analysts described bitcoin as a risky asset. Yes, cryptocurrencies do not serve as a haven for investors, nor can they meet their hedging requirements. However, they accurately reflect the market's demand for an alternative currency, which is somewhat true for gold.

What do crypto and gold have in common?

The most obvious parallel between cryptocurrencies and gold is that both require mining.  Geologists explore precious metal deposits before miners or prospectors begin work. Virtual assets must also be mined by performing complex calculations with specialized equipment. 

Both cryptocurrencies and gold are limited in supply. Only about 21 million bitcoins can ever be mined by humans, according to an algorithm. Most of them have already been brought into circulation. As for gold, our civilization has already mined 190 thousand tons of precious metal. To grasp the scale, imagine a cube with a face length of 21 meters. The underground gold reserves are currently estimated at about 112 thousand tons. 60 thousand tons of them have been explored.

Of course, the deficit is not the topic at this time. However, as you may be aware, the price of a product is determined by supply and demand. Due to the limited supply, prices inevitably rise as demand rises. Therefore, investors expect both crypto and gold to maintain their value over time. In contrast to fiat money, which central banks can print at any time and in any quantity.

Other characteristics that cryptocurrency and gold share include:

1. Such assets are durable; it takes significant effort to crash them.
2. They are relatively easy to transport and store. Gold is quite compact, and “packs” of cryptocurrency millions fit perfectly in their owner’s smartphone.
3. The fact that all gold and cryptocurrency transactions are recorded is especially important for investors.

The main distinctions between crypto and gold

Undoubtedly, it's very simple to bring a gold bar and a smartphone to the nearby store or restaurant. However, it will never work to just use a piece of gold to pay for a cup of coffee. But Bitcoin can be divided down to 8 decimal places. Therefore, in contrast to gold, cryptocurrencies have a much wider application in daily life.

For thousands of years, people have used gold as an investment asset. And only a few years have passed since Bitcoin first entered the market. Objectively, gold's goodwill remains incomparably greater than that of digital currency. However, the explosive growth of crypto on the global market, the interest from the authorities, and the active increase in the crypto community all contribute to the rapid growth of the global recognition of virtual assets.

At the same time, the target audiences for gold and cryptocurrency are vastly different. The enthusiasm of millennial investors strengthens the position of cryptocurrencies as an alternative to precious metals. Generational change is an unavoidable fact of life. The largest segment of the investment market will soon be made up entirely of today's youth.

They saw bitcoin’s annual profits between 2011 and 2021 that were far greater than those of gold. Bitcoin has provided investors with returns of more than 17,000% over the course of its existence. This amount is vastly greater than the annual yield of gold. For instance, gold generated only a 1.5% annual return during the same decade.

Gold versus bitcoin in the context of a $1 investment in 2009. 

Source: Woobull Charts

Stakeholders believe bitcoin is superior to gold

“I believe bitcoin has replaced gold. Children who grew up holding iPads and dreaming of the metaverse cannot be persuaded to save money in gold bars or gold teeth,” Volodymyr Nosov, founder and CEO of the European centralized crypto exchange WhiteBIT, told Forbes Ukraine.

The American billionaire Mark Cuban, on the other hand, already favors investing primarily in digital assets rather than gold. Additionally, he recently expressed optimism about Bitcoin in an interview and said he hopes the price keeps falling. Cuban intends to purchase as many coins as he can. “If you have gold, you're dumb as f*ck,” the billionaire said gruffly. At the same time, he noted another significant parallel between crypto and gold: “When you own gold, all you own is a digital transaction.” In other words, the majority of gold investors do not actually own any gold. 

Currently, the financial journey of cryptocurrencies is just getting started. Like any new technology, cryptocurrencies need time to become more stable. So far, private sector investments in gold and bitcoin have been incomparable: the crypto markets are only about 2.5% of the total gold market cap. Analysts, however, believe that this ratio represents the cryptocurrency's greatest growth opportunity. It has every chance of making a qualitative breakthrough in the face of global inflation and high interest rates, having received investor recognition and unconditional confidence.