“Should Bitcoin Be Compared to Gold? What We Can Learn from the Last Financial Crisis”
Bitcoin has risen to nearly $100,000 with a significant market cap nearing $2 trillion. Many supporters of investing in Bitcoin draw parallels between the cryptocurrency and gold, a traditional safe-haven asset with a proven track record of retaining value. But how valid is this comparison, and what risks does it conceal?
A profound understanding of this issue is essential. One of us has a comprehensive background in the study of technological innovations spanning over two decades, while the other has delved into the interplay between innovation, analogies, and financial crises.
Reflecting on the origins of the 2008 financial crisis provides valuable insights. During that time, investors likened mortgage-backed securities (MBS) to bonds. Despite having different risk profiles, MBS were falsely equated to bonds by credit rating agencies, leading even conservative investors like pension funds to invest heavily in these so-called safe securities. This flawed analogy masked critical features of the financial system, such as excessive leverage, opaque ownership structures, regulatory discrepancies, and deficient risk management tools, eventually exacerbating systemic risks and triggering a widespread financial meltdown.
Analogies, although instrumental in simplifying complex concepts and fostering comprehension, carry an inherent risk of blurring crucial details that could be pivotal in assessing the true nature and implications of an innovation, as evidenced by the MBS debacle during the 2008 crisis.
The designation of Bitcoin as “digital gold” has gained popularity since its inception in 2009, accentuating its technological allure, fixed supply, decentralized governance, and blockchain foundation. Advocates of Bitcoin perceive it as a digital store of value capable of offering long-term returns and safeguarding against inflation and economic volatility.
Consequently, individuals and institutional investors are increasingly gravitating towards Bitcoin and Bitcoin Exchange-Traded Funds (ETFs) under the guise of it being the new-age equivalent of gold. Notably, Larry Fink, CEO of BlackRock, who once criticized Bitcoin, confessed to misjudging the cryptocurrency and now endorses it as a “digital gold” and a legitimate financial instrument. Projections suggest that cryptocurrency ETFs will surpass precious metal ETFs in North American assets, positioning them as the third-largest asset class in the $15 trillion global ETF industry by the end of 2025.
While the parallels drawn between Bitcoin and gold seem enticing and uncontroversial, they obfuscate critical distinctions regarding value composition and ownership structures. Unlike Bitcoin, gold possesses intrinsic physical attributes as a precious metal, making it indispensable for various applications like jewelry, electronics, and medicine. Approximately half of the world’s gold reserves are utilized in such industries, with the remainder held by central banks or private entities.
Furthermore, the purity of gold can be easily determined through simple scientific tests, rendering its value structure more tangible and transparent than that of Bitcoin. Despite gold’s historical resilience in preserving value during cataclysmic events like wars, the durability of Bitcoin amidst a substantial socio-economic upheaval remains uncertain.
