Will Bitcoin Recover from Recent Lows to Become Stronger than Gold in 2022?

It’s a question that’s becoming increasingly pertinent as cryptocurrency adoption continues to grow: can Bitcoin become stronger than gold in 2022?

Naturally, there are plenty of stark differences between the two assets. For starters, the market capitalization of gold is approximately $12.5 trillion, whilst Bitcoin is closer to $800 billion at present - illustrating the ground that BTC still has to make up in terms of wider adoption.

However, in terms of asset value, Bitcoin’s scarcity has ensured that its price has far outweighed gold. Although today’s price of BTC at $41,500 is 40% lower than its all-time high from November 2021, gold’s price of around $2k is unlikely to catch up soon.

What these fundamentals suggest is that Bitcoin and gold are fundamentally different entities, so why are there so many comparisons between the two?

The answer can be found in wealth preservation. Both BTC and gold are commodities that don’t belong to a single centralized entity. This means that they don’t belong to any government or economy and thus shouldn’t be directly impacted by economic or market downturns in theory.

Although the decentralized nature of BTC should theoretically make the asset more stable in the face of downturns across other markets, the asset’s price history shows this isn’t the case. Between April and July 2021, Bitcoin shed 50% of its value, before nearly repeating the feat between late 2021 and early 2022.

As we can see from the price of gold over the past year, the metal has had a stronger response to the recent market volatility caused by high inflation rates and the recent emergence of fresh geopolitical tensions in Eastern Europe.

In fact, gold’s recent rally to a value of $2,039.05 is only the second time the commodity has breached the $2,000 barrier - showing the popularity of the metal in the wake of Russia’s invasion of Ukraine and investor fears over the stock market ramifications.

Technology that paves the way for ‘digital gold’

Should Bitcoin continue to win adoption around the world from enterprises and individual investors alike, it will likely come down to the asset’s ability to function as a digital version of gold.

Cryptocurrency advocates have long looked to a world where digital assets can find true utility throughout daily life, and as of today, digital currencies are yet to realize their true potential as a legitimate store of value.

With large scale institutions like Tesla, Block and MicroStrategy ramping up their adoption of BTC, it’s clear to see that the path has been set for other firms to embrace Bitcoin as digital gold.

Because of its blockchain framework and the possibility of borderless transactions, Bitcoin holds more functionality as a safe haven asset candidate than gold. The digital currency can be stored remotely and used to broker deals with other businesses around the world with far smaller fees involved.

The emergence of decentralized applications also means that it’s possible to access financial tools with the cryptocurrency, and to use smart contracts to execute complex business deals, and broker loans for other parties.

This functionality also indicates that Bitcoin has a bright future ahead. Although the commodity’s current market cap is some way off gold, investors can see this as a great opportunity for future growth, which will help to bolster the value of the coin further over time.

One of Bitcoin’s most important technological qualities is the fact that it’s programmed to have a maximum circulation of just 21 million BTC. This makes Bitcoin an extremely scarce asset, which, in turn, means that further adoption will invariably accelerate the coin’s value in the future.

However, BTC is also vulnerable to market speculation, and the asset is heavily influenced by investor sentiment. This means that, despite its technological applications, Bitcoin is likely to remain far more volatile than gold - particularly whilst the asset’s market capitalization is just a fraction of the precious metal.

Mounting Challenges on the Horizon for Bitcoin

Whilst Bitcoin is brimful of cutting-edge technology, it also makes the asset more complex than the simplicity of gold, and subject to some vulnerabilities.

To cope with global demand, Bitcoin is built on off-chain transactions where users make purchases outside of the blockchain framework that the coin’s built on. This leaves one of Bitcoin’s most essential assets virtually redundant for the vast majority of its practical use cases. This can also lead to more issues with security and verifiability that could lead to some foul play with the BTC that individuals hold.

Processing transactions on the block for Bitcoin exchanges can also be extremely time consuming, and such energy constraints have led to Bitcoin using up more electricity yearly than the entirety of Argentina. In spite of its energy-guzzling framework, just 10 transactions can be written to BTC’s blockchain per second - making the coin’s framework entirely unsustainable for processing large-scale on the block transactions.

As an asset that’s existed throughout history as an internationally recognized commodity, there’s no need for such technological backbones to prop up gold - and a strong regulatory framework has helped to manage how the commodity is sold, stored, and spent.

Maxim Manturov, head of investment advice for Freedom Finance Europe, has warned that the future price movements of Bitcoin are less assured than we may be led to believe, too.

“If we compare the situation from summer 2021, when Bitcoin grew on inflation expectations and was to some extent a temporary digital alternative to gold, and the current situation, one important difference is worth highlighting: on the 15th of March the Fed started the process of raising rates and ending quantitative easing, which has been the fundamental reason for all bitcoin and cryptocurrency growth in the last 2 years,” Manturov claimed.

“And with higher rates, an asset class like cryptocurrency may be less attractive. Gold in turn rose because of geopolitical risks and rising inflation expectations, against that backdrop.”

Despite there being clear issues for Bitcoin to iron out, greater levels of investor and institutional adoption can help BTC to become stronger than gold. With such significant disparity between their respective market caps, any flippening in this regard is unlikely to take place in 2022, but the technology could evolve to become a more attractive proposition in the coming years.

For now, however, recent geopolitical and economic events have shown that gold still remains the commodity of choice for investors looking for a financial safe haven amidst choppy fiscal waters.

Author bio

Dmytro is a tech and finance writer based in London. Founder of Solvid and Pridicto. His work has been published in Nasdaq, Kiplinger, Financial Express, and The Diplomat.