Will Bitcoin Overcome Instability to Replace Gold?

After a blistering start to 2021 and two impressive rallies towards breaching all-time highs, confidence in BTC reached new heights last year, with many investors expressing confidence that the asset will surpass $100k at the beginning of 2022.

Sadly, such optimism was short-lived, and BTC/USD tumbled more than 50% from its $69,044.77 peak on November 10th, 2021 at one stage.

As we can see from Bitcoin’s price chart, the cryptocurrency hasn’t quite fallen back to its July 2021 levels, but there’s a clear consistent decline that we’re yet to see a meaningful bounce from.

“At one point, Bitcoin became one of the protections against inflation and an alternative to gold, which generally drove crypto-assets,” said Maxim Manturov, head of investment advice at Freedom Finance Europe. “Therefore, it is worth keeping in mind that the Fed will start to raise rates, cut QE and balance sheets to fight inflation, and in such an environment Bitcoin could become more volatile and rebound attempts will be more moderate, there will be more competition for cash and therefore better opportunities for investors and a more realistic risk and reward environment.”

With this in mind, the ongoing uncertainty surrounding Bitcoin’s performance may offer a buying opportunity for investors.

“Since early November 2021, bitcoin, after testing a high of $69,000, and cryptocurrency, in general, is moving in downward trends and correction channels. To begin with, it is worth understanding the reasons behind the rise of BTC and other crypto assets, first and foremost the unprecedented liquidity in the financial system, which contributed to the rise of all risky assets on the planet, setting the stage for the subsequent imbalance in demand in the market” he added.

Significantly, Bitcoin’s ability to recover from its current price struggles could have a significant impact on the cryptocurrency’s perception as ‘digital gold.’ Although gold is a popular commodity to hold during inflationary times, its performance, as shown above, has become far more disappointing in comparison to other commodities and REITs.

Replacing ‘Relic’ Gold

Jeremy Allaire, Circle CEO, believes that Bitcoin shouldn’t be regarded as digital gold because the cryptocurrency has the potential to go much further than the precious metal.

“I don’t actually like the ‘digital gold’ analogy, because gold is such a relic. It has extremely limited value as a form of exchange and it’s never had utility in modern society as a form of money. I think the demand for bitcoin is actually going to be much, much larger,” Allair explained.

Allaire is optimistic about the future of Bitcoin and believes that the asset is likely to reach a value of over $1 million over time.

Because Bitcoin is the first and best-known cryptocurrency, the coin’s technical framework and blockchain are less functional than other coins like Ethereum. Whilst it’s still entirely possible that we’ll see a future built on widespread BTC transactions, it’s more likely that Bitcoin will be primarily regarded as a store of wealth.

This makes Bitcoin more similar to gold than other fiat currencies, and this can be a good thing for its investors – many of whom remain optimistic over the coin’s recovery.

Fred Schebesta, co-founder of Finder, shares Jeremy Allaire’s bullish outlook on BTC.

“Bitcoin is in a phase of correction and this could last for the rest of the year as it settles into more stability,” Schebesta noted in a recent interview. “It’s highly volatile but over time it will become less volatile and the swings will be fewer and not as sharp.”

Schebesta believes that by December 2022, BTC will have mounted a strong recovery from its current lows, and will have reached a value of $105,000.

The Fallacy of Mainstream Adoption

Although the prospect of mainstream adoption has followed Bitcoin investors and helped them to justify the notion that the coin is set for more price increases as more individuals buy up the asset, Goldman Sachs has argued that this isn’t necessarily going to be the case.

According to a note from the banking giants, mainstream acceptance of cryptocurrency assets would be likely to increase their correlation to other mainstream asset classes.

“While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class,” the note, authored by Zach Pandl and Isabella Rosenberg claimed. They also added that mainstream adoption would be a “double-edged sword” for cryptocurrencies.

If such a correlation begins to take place, it’s likely to mean the end of the parabolic price rallies that cryptocurrency has become famous for.

Although the future for Bitcoin remains unclear, its digital nature means that it can represent a more functional store of wealth than gold, and it’s reasonable to expect the trend of investors buying into BTC as opposed to the precious metal continuing to grow over time.

Whether BTC’s purchase prices will remain at around $37,000, $100,000, or $1,000,000 for investors over the longer-term future, however, remains to be seen.