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Bitcoin, the first-ever cryptocurrency, has been gaining popularity since its inception in 2009 and has revolutionized how we think about money. Initially dismissed as a novelty or a fad, Bitcoin has proven to be much more than that. It has emerged as a viable investment asset that investors are increasingly considering as the new gold. Due to the recent turmoil in the financial markets, investors turn to Bitcoin as a store of value and a hedge against economic instability. In this article, we explore the similarities between Bitcoin and gold, and how it’s challenging traditional investment vehicles like stocks and bonds.
The SVB Bank Run and USDC Depeg
On March 10, regulators shuttered the Silicon Valley Bank (SVB) and seized its deposits. SVB’s spectacular implosion began late Wednesday when the bank announced it needed $2.25 billion to shore up its balance sheet. According to a California regulatory filing, SVB customers withdrew a whopping $42 billion of deposits by the end of Thursday. SVB failed to gather enough collateral from other sources and ended up with a negative cash balance of $958 million.
What followed was the rapid collapse of one of the top 20 largest banks in the United States that had grown alongside its crypto clients. The event has become the largest US banking failure since the Washington Mutual in 2008.
On March 11, Circle tweeted that $3.3 billion of its $40 billion USDC reserves remain at SVB. The tweet triggered a sell-off that resulted in the stablecoin depegging and falling below $1. The cryptocurrency industry is still picking up the pieces after the sudden collapse of stablecoin UST last year, and USDC’s depeg could have resulted in similar consequences as some stablecoins are also vulnerable to runs.
The SVB bank run and USDC depeg caused significant panic among cryptocurrency investors. As a result, they were left scrambling to figure out where they could safely store their wealth. Bitcoin emerged as a clear winner as its price has been rising steadily for months, and investors saw it as a safe haven amid economic turmoil. And Bitcoin price jumped from around $19,500 to over $26,500 in just a few days. This demonstrated that Bitcoin has the potential to become a store of value during times of financial uncertainty.
Price Action
Bitcoin’s price action in recent years has also shown its potential to become a new gold. While Bitcoin’s price has been highly volatile since its inception, it has been trending upwards for most of its existence. In 2020, Bitcoin’s cost started at around $7,000 and ended the year at over $28,000, a gain of over 300%. In 2021, Bitcoin surged even higher, reaching an all-time high of over $68,789.63 in November.
However, like gold, Bitcoin also experienced significant pullbacks in the market. In November 2022, Bitcoin’s price fell below $16,000, a year after it reached its record high. Factors like the collapse of crypto exchanges, crypto bans in countries like China, environmental concerns, etc., mainly caused the fall. But just like gold, Bitcoin has shown resilience and has rebounded from these pullbacks, indicating its potential to become a long-term store of value.
In light of the recent banking collapse and the uncertain future of Credit Suisse, people started to flock to crypto exchanges to buy BTC. Trading volume on the leading crypto trading platforms like Gate.io has peaked at $2.3 billion, which indicates the sheer strength crypto has grown to acquire over the past few years.
Properties of Bitcoin that make it Gold-like
So why are people comparing Bitcoin to gold? There are several properties that Bitcoin shares with gold that make it an attractive store of value:
Limited Supply: Gold is a finite resource that is difficult to mine, and it’s estimated that only about 197,576 metric tons of gold have been mined throughout history. Similarly, Bitcoin has a finite supply of 21 million coins, and the mining difficulty increases over time, making it harder to mine new coins. This means it is resistant to inflation and cannot quickly be devalued by governments or central banks.
Decentralization: Both gold and Bitcoin have a decentralized nature that makes them independent of any central authority. Gold is not controlled by any government or financial institution, and Bitcoin operates on a decentralized blockchain network that is not controlled by any central authority.
Portable and Divisible: Gold can be melted down into smaller pieces, and Bitcoin can be divided into tiny fractions, allowing easy transfer and storage. And while you can easily carry gold as coins or bars, you can also transfer Bitcoin to digital wallets anywhere on Earth.
Store of Value: Gold has been used as a store of value for over 5,000 years, and its value has been recognized across different civilizations and cultures. On the other hand, Bitcoin has only been around for over a decade, but many investors have already recognized its value.
Volatility: Gold prices can fluctuate based on a variety of factors, including economic conditions, geopolitical events, and changes in supply and demand. Similarly, Bitcoin prices can be highly volatile due to changes in demand, regulatory developments, and technological advancements.
Summary
Bitcoin is becoming a legitimate asset investors turn to as a hedge against economic instability. As we have seen with the SVB bank run and the USDC depeg, people realize that traditional financial institutions and even stablecoins can be risky and unreliable. In contrast, Bitcoin offers a decentralized and transparent system that is not controlled by any central authority.
Of course, there are still risks associated with Bitcoin. However, it has proven to be a resilient and adaptable asset capable of responding to changing market conditions. Bitcoin has been around for over a decade and has withstood numerous market cycles and economic shocks. It’s clear that Bitcoin is here to stay. And whether it can replace gold as the ultimate reserve of value remains to be seen, but it’s definitely a strong contender.
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