Cryptocurrencies and Inflation Hedging: Can Bitcoin Really Replace Gold?

In economics and finance, we study different types of assets in which people can store their wealth.  The desirability of an asset is affected by several factors, which include liquidity and risk of loss, as well as expected rate of return (growth of value).  Because the economy is cyclical, many investors diversify their investments so that some will do well during recessions or periods of economic instability.  Investments that do well during downturns or periods of instability are known as hedges.  These investments tend to increase in value when typical investments, usually stocks, decline in value.

Traditional Hedge Investment: Precious Metals

Historically, precious metals, especially gold, have been a popular hedge investment.  Gold has traditionally been a hedge against inflation, or the decline in the purchasing power of money.  The rarity of precious metals helps them retain value, especially during periods of high inflation when there appears to be an overabundance of currency in the economy.  Many investors are also drawn to the tangibility of precious metal investments, which are often purchased in standardized sizes and weights, such as one-ounce coins.  Standardized bars and coins are known as bullion, with value being determined by the weight of the precious metal used.

The Gold Standard

Although gold is no longer legal tender as currency, its previous use as part of the U.S. currency system makes it popular with investors.  Many Western countries, including the United States, used a gold standard between the 1800s and early 1900s to maintain the value of paper currency.  In theory, every paper dollar or pound was backed by the same fixed value of gold, for which paper currency could be exchanged.  This maintained public confidence in new paper currency, which had replaced precious metal coinage (gold and silver).

The United States ended its domestic gold standard in 1933 to allow for the production of more paper money during the Great Depression.  In 1971, the U.S. international gold standard was abandoned because too many foreigners were exchanging American currency for gold.  Despite these gold standards being abolished, many people still associate gold with money.  This may be amplified by the fact that many gold bullion coins look like currency.  Some investors intentionally seek legal tender gold coins, which were minted prior to 1933, to combine their precious metal value and their collectible numismatic value as rare and historic coins.

Modern Hedge Investment: Cryptocurrency

Cryptocurrency was invented in 2009 with the emergence of Bitcoin.  This digital currency became popular with investors due to its mathematical limit of creation - only a fixed amount of Bitcoin can be “mined” digitally using blockchain technology.  Over time, it is harder and harder to “mine” a Bitcoin, slowing the rate of expansion and making it a popular hedge against inflation.  Users and investors store their Bitcoins in digital wallets, which can be stored on portable hard drives.  

Popularity of Bitcoin

Bitcoin has become the most well-known cryptocurrency and is accepted as payment by many companies.  However, despite the digital currency being often seen as akin to a debit card, it is not legal tender and is not accepted as payment by most government agencies, including the U.S. Internal Revenue Service.  This may be confusing due to the fact that there are Bitcoin ATMs (automatic teller machines) where Bitcoin - and potentially other cryptocurrencies as well - can be exchanged for paper currency.  The perception that Bitcoin can be used as easily as currency has likely contributed to its popularity.

Despite not being legal tender, Bitcoin’s digital nature makes it very liquid (spendable).  It can be exchanged for goods and services over the Internet, or swapped for other electronic assets, such as other cryptocurrencies.  Some may see off-line digital wallets storing Bitcoin and other cryptocurrencies as safer from theft than drawers or safes of precious metals (although online-connected digital wallets can be hacked).  The rapid rise in value of Bitcoin, peaking at over $100,00 per coin, has also enhanced its appeal; it is currently valued at about $85,000 per coin in March 2025.

Can Bitcoin Replace Gold as the Most Desirable Inflation Hedge?

Investors looking for a hedge against inflation may now choose to allocate their funds between these two popular commodities (items that are not legal tender currency).  In regard to diversification, it would be prudent for investors to purchase some of both investments rather than putting all of their money in one or the other.  The proportion, however, could certainly be skewed based on the following factors:

Advantages of Gold

As a physical commodity, gold is not going anywhere.  Even if the Internet suffers a catastrophic shutdown, the precious metals stored in safes and drawers will remain unscathed.  It will retain its psychological power of weight and heft (gold is very dense), which is desirable to many investors and consumers.  In addition to its impressive appearance and tangible attributes, gold’s rich history as currency adds to its psychological power.  Realistic or not, gold has an impressive grasp on us: think of all the heist movies where the antagonists (or protagonists) attempt to steal quantities of the stuff.

Advantages of Bitcoin

Gold may not be going anywhere, but it is difficult to spend.  Bitcoin is much more liquid due to its digital nature; it can be transferred electronically.  Gold, by contrast, must first be sold and converted into currency, during which some of its value will be lost.  This buy-to-sell spread for gold can be more than 5 percent, representing a considerable loss in value.  However, this same risk exists for all investments.  On the whole, gold has considerably more transaction costs than Bitcoin due to its physical nature.  Bitcoin is also far easier to store and transport, as unlimited amounts can fit into palm-sized portable hard drives.  It can also be purchased in fractions of a unit, while gold must be purchased in a minimum size (such as a one-ounce coin).

[Relative] Weaknesses of Both as a Hedge

Both gold and Bitcoin are commodities and, unlike stocks and bonds, are not backed by any entity’s revenue.  While the stock market may be tumbling during the outset of a recession, those stocks are still backed by their corporations’ incomes.  Bonds, as well, are backed by the revenues of corporations or government entities (via taxation).  This makes gold and Bitcoin very vulnerable to investor confidence.  If investors lose confidence in a commodity, there is no revenue backing it up and the value may drop very quickly.  

In terms of volatility, gold is less volatile (meaning more stable) than Bitcoin.  This may make it more desirable as a pure hedge, but it is also less likely to see strong growth in value versus Bitcoin.  In this regard, gold may be seen as more akin to bonds and Bitcoin may be seen as more akin to stocks. During periods of inflation, however, investors may want more money coming in, which they can get from dividends on shares of stock or interest payments on bonds - commodities provide zero units of income during the period they are held.

The Final Word: Can Bitcoin Really Replace Gold?

It is unlikely that Bitcoin can really replace gold due to gold’s strong history as an investment and part of the historic economy.  Many investors will continue to desire gold as a stable and tangible investment and distrust Bitcoin’s increased volatility.  Younger investors are more likely to prefer Bitcoin, which has greater growth potential, while older investors are more likely to stick with gold and other precious metal bullion.  Over time, Bitcoin and other cryptocurrencies may enjoy more investors compared to gold as young investors who prefer to use apps and websites find it easier to buy units of crypto, especially in fractions of units that allow for small-dollar investments.  Gold must often be purchased in one-ounce coins, which cost $3,000 or more and may be out of the price range of young investors.