Bitcoin as Digital Gold?

February 22, 2022

An oft-repeated idea put forward by crypto enthusiasts such as Michael Saylor, the CEO of software company MicroStrategy – who’s company held a position in the cryptocurrency valued at close to $6 billion in December 2021 – is that bitcoin is gold for the digital age. The two assets are obviously very different in many ways, one being a shiny metal and the other a decentralized digital currency. However, the argument put forth by proponents of the “bitcoin as digital gold” idea is one of function: that from a financial standpoint both assets may serve the same purpose in a portfolio. Below we examine some of the key reasons that argument is made, and how much weight it holds.

Store of Value

Simply put, a store of value asset is one that preserves purchasing power. While the definition has been applied to various assets from art to bonds, some of the assets most frequently put forward are gold and other precious metals. The metal is relatively scarce, has been used for thousands of years as a medium of exchange for goods and services, and has been demonstrated to historically retain its purchasing power – at least in the long-term.

With bitcoin on the other hand, whether or not the cryptocurrency functions as a store of value is hotly contested. In a January 2017 press conference, U.S. secretary of the treasury and former chair of the Federal Reserve Janet Yellen, stated that bitcoin is a highly speculative asset and not a store of value.  The simplest argument as to why bitcoin is not a reliable store of value is that its historical track record is too short, having been created, along with blockchain technology, in 2009. While the asset could preserve purchasing power, it will likely be many years before that can be decisively determined.

One of the strongest arguments for bitcoin not acting as a store of value is it’s volatility. Afterall, the currency declined about 19% in the first month of 2022. However, as noted by Morningstar analyst Amy Arnott, over the 11-year period from September 2010 to October 2021, bitcoin exhibited fewer downturns compared to gold. While this metric does bolster the argument in favor of bitcoin, the downturns that BTC did exhibit were far more severe than gold, with an average drawdown of around 31% versus an average drawdown for gold of around 8.6%.

While it may be too early to definitively say whether or not bitcoin is a true store of value, at least one major player in the financial markets has lumped it into that category. In a January report, Goldman Sachs illustrated that bitcoin’s float-adjusted market capitalization represented about 20% of the “store of value” market.


Historically, one of the primary reasons that investors have turned to gold is diversification of their investment portfolios. According to investment manager State Street:

“The diversification provided to portfolios with a long term strategic allocation to gold may potentially help investors preserve capital and limit portfolio drawdowns during certain periods of market dislocation.”

Similarly, one of the value propositions put forth by bitcoin proponents is that it could provide diversification benefits. In Fidelity Digital Assets’ 2021 Institutional Investor Digital Assets Study, 37% of investors surveyed indicated that the appeal of digital assets is that they are seen to be uncorrelated to other assets.

Diversification ultimately arises from asset classes having low return correlation. For context, a correlation of 1 would indicate perfect positive correlation – the two asset classes move in lock-step with each other.

According to data from Morningstar, gold had a correlation to U.S. stocks of just .06 for the 36-month period ended September 30, 2021. In the same study, Morningstar put the correlation between bitcoin and stocks at .33 in the same time period. On January 21, 2022 Bloomberg noted the 100-day correlation was only .008 between the Nasdaq 100 and gold. For bitcoin, the correlation measure was .4 relative to the Nasdaq in the same period.

By both company’s measures, the correlation between gold and stocks is significantly lower than between bitcoin and stocks. Morningstar further noted that bitcoin’s correlation has trended up in recent years, while gold’s has declined. A recent study published by the International Monetary Fund concluded:

“…the interconnectedness between crypto and equity markets has increased notably over 2017–2021… the correlation between Bitcoin price volatility and S&P 500 index volatility has increased more than four-fold… with a significant increase in the correlation between Bitcoin and S&P 500 returns…”

Although the reasons for BTC’s increasing correlation to stocks are open to speculation, it does seem clear that the low correlation argument has weakened – at least for stocks. Interestingly however, Morningstar did note that bitcoin has a negative correlation with longer-term bonds, while gold has a slightly positive correlation. In that way, it concluded “Bitcoin might have an advantage when it comes to providing a hedge against rising interest rates.”

Inflation Hedge

It is a commonly held belief that gold can provide a safe haven during times of inflation. However, in many instances, the data does not support this conclusion. Research from Duke University professors Campbell Harvey and Claude Erb noted that while the asset may potentially be useful for maintaining purchasing power, there is “… little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term.” In situations of significant currency debasement, such as with hyperinflations, the authors added, gold could provide some protection.

In a similar analysis, Morningstar analysts concluded that gold’s record as a hedge against inflation is mixed. It performed well during high inflation periods in the 1970s, but posted negative returns through inflationary periods in the 1980s. Data from the analysis further demonstrated a correlation coefficient of only .07 between gold and inflation between 2005 and 2020.

The argument for bitcoin as an inflation hedging asset is more theoretical, based on the nature of the digital currency. That is because the supply of bitcoins is fixed – the maximum number that will ever exist is just under 21 million, 89% of which is already in circulation.

This mechanism is in direct contrast with fiat currencies where central banks have the ability to expand the money supply. That being said, inflation has been relatively low since bitcoin’s inception in 2009, so it is difficult to say how it might perform in an inflationary environment. With inflation running hot – the CPI rose from about 1.4 to 7.5 from January 2021 to January 2022 – we may soon get a better picture of the crypto asset’s inflation hedging abilities.

Is bitcoin digital gold?

If we look at the three qualities above – store of value, diversification, and inflation hedge – it appears that bitcoin and gold are quite far apart in both form and function. However, it is still relatively early days for bitcoin, other cryptocurrencies like Ethereum, and blockchain technology more broadly, while gold has had thousands of years to integrate with our financial markets.

This content is for informational purposes only and not intended to be investing advice.

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