alt
  • You are here :
  • Home / Articles

This Diwali: Consider Digital Gold - Bitcoin

tset
It’s been a while since the debate over whether Bitcoin can be called digital gold or not began.

Further, aside from dubbing Bitcoin the ‘digital gold’, quite a few financial experts have also pointed out Bitcoin as basically a better alternative to gold.

Ever since Bitcoin first started trading on various exchange platforms back in the July of 2010, investors and traders have compared it with gold, the ruling alternative asset class for investors worldwide. A decade later, Bitcoin is a household term. And as we approach Diwali, so is its synonymity with Gold. Albeit, with that digital prefix. As crypto has grown in popularity, many Indian investors have chosen Bitcoin as their preferred asset class. And globally, Bitcoin outperformed gold by a large margin in 2020 , with the crypto surging about 800% during the year .

It’s been a while since the debate over whether Bitcoin can be called digital gold or not began. As Jeroen Blokland, the ex-head of multi-asset funds at Robeco, put it- “...there’s growing consensus on what bitcoin really is. In recent months, a clear and emphatic narrative that bitcoin is becoming a store of value in the form of digital gold has developed.” Further, aside from dubbing Bitcoin the ‘digital gold’, quite a few financial experts have also pointed out Bitcoin as basically a better alternative to gold. For instance, there’s the US Federal Reserve Chairman Jerome Powell, who talks of Bitcoin as ‘essentially a substitute for gold rather than for the dollar’.

In this post, as our national festival of lights and prosperity approaches, we take a look at some aspects of both gold and Bitcoin and how they compare with each other, and try to answer the ultimate question for you - is Bitcoin really digital gold? Is it time it replaced the ageing commodity in India?

Why do Indians Buy Gold?
Throughout history, it’s clear that gold has had value ever since the precious metal was first excavated. Today, gold has become perhaps the most revered asset class among traditional investors. Plus, from the urge new age investors feel to collate an emerging asset class like Bitcoin with gold and define it by the term ‘digital gold’ goes on to show just how strong of an asset class gold really is.
Even as crypto takes on the world and Bitcoin performs better than gold, the metal has proven itself an asset that can emerge on the other side of volatile market conditions more powerful than ever. As Anuj Gupta, the Vice President - Commodity and Currencies of IIFL Securities, says: “The charm of gold has not diminished any bit and it has, in fact, increased after generating double-digit returns in the last one year."
Gold’s popularity in India is on a level that leaves most other nations in the dust. Did you know that Indian houseswives own 11% of all the world’s gold? That’s more than the national reserves of the IMF, USA, Switzerland and Germany put together! India’s household gold is valued at 40% of its GDP !
Now, Bitcoin may be all set to change that forever.

Exploring Bitcoin as an Asset Class
As we know, Bitcoin was launched back in 2009 by the pseudonymous Satoshi Nakamoto with the goal of creating a decentralized monetary system. While the notion of a decentralized, peer-to-peer currency had seemed ridiculous to many at first, Bitcoin’s success and excellent performance in the consequent years have already proven otherwise.
Bitcoin has generated significant returns for long-time investors. Since it started trading on exchanges, Bitcoin’s average annual return has been an astounding 254.2%, especially compared to gold’s 3.5%, which is the third best-performing asset class.

tset

The only problem with Bitcoin - or any other crypto, really, is that it's volatile. Since there are significant variations to Bitcoin’s price almost every day, and since the average annualized return of Bitcoin is a startling 114% (about ten times as much as gold), Bitcoin is classified as a high-risk asset class.
However, despite the issue with price fluctuation, Bitcoin’s profitability so far is clearly great. Just like gold, Bitcoin has also made it through tumultuous market conditions and performed better than ever and proven itself as an asset class here to play the long game.
India already has 10 crore Bitcoin investors - higher than anywhere else in the world! Over 16% of urban Indians are crypto investors - a number that we’ll certainly see rise every Diwali.
Why will an increasing number of Indians switch to this digital gold of our era? Let’s explore some fundamental characteristics of Bitcoin to determine this.

Gold vs Bitcoin: Can Bitcoin Really Be Called Digital Gold?
As per the ancient Greek philosopher Aristotle, any asset that acts as money should be abiding by three main criteria, which are:
1. a medium of exchange,
2. a unit of account, and
3. a store of value
Going by this definition, let’s see how gold and Bitcoin fare as currency when compared with each other:
1. As a Medium of Exchange: Since both gold and bitcoin can be swapped out by holders for products and services of their choice, they both, of course, qualify as mediums of exchange.
2. As a Unit of Account: Gold can be split into half ounces or quarter ounces, and Bitcoin can also be divided into 1 Satoshi, which is the same as 1/100,000,000 bitcoin.
3.As a Store of Value: Now, this is where Bitcoin and gold have some major differences. When an asset is called a store of value, it means it’s an asset you depend on during economically uncertain times since it has intrinsic value. Gold has been a store of value for a long time now. However, Bitcoin falls short next to gold here because it does not have a long history of being known as a store of value. Even though Bitcoin has played the role of a store of value in the past, as Bitcoin is witnessing a price slump in mid-2021, many crypto traders are again bringing the old argument back - that Bitcoin doesn’t have any intrinsic value since it’s intangible and exists only over the internet.
Compare Bitcoin with gold, and you’ll see similar attributes that affirm that it won't be wrong to call Bitcoin digital gold. Just like gold, Bitcoin is a scarce, as well as durable asset. What’s more, Bitcoin has high portability. It is easy to trade and easily programmable too. Long-time investors and those who understand the crypto market do accept Bitcoin as a store of value asset class because, again, just like gold, Bitcoin can act as a hedge against the devaluation of currency and volatility.
As for the debate about Bitcoin’s lack of intrinsic value - the Bitcoin network comes with certain security and transparency that not none of the tangible asset classes provide. Just like Bitcoin, gold and other assets of value like diamonds, any art piece, do not provide cash flows. Yet all these other assets are recognized as assets with monetary value, and most of them are also considered stores of value.

We remain hopeful that in the coming times, we’ll see Bitcoin established as a store of value across India, and of course, the world. Remember though, as Bloomberg’s Tracy Alloway once said, ultimately Bitcoin is versatile enough to be whatever you want it to be, which makes it “the perfect post-modern financial asset.” For a generation of Indians that are growing up as natives in a digital-first world, Bitcoin is an obvious choice. Will we see a spike in Bitcoin’s price this Diwali? One would hope so!
To buy and trade Bitcoin in India, give WazirX a visit!

This article is authored by Pratik Ahuja, Senior Manager, Marketing at WazirX

Advertisement alt alt