More and more people believe that Bitcoin may soon replace gold as a safe haven against the depreciating dollar. Of course, this is just speculation, but it is curious to see how enthusiastic people are about Bitcoin.

Aside from the fact that there are many digital coins (assets), what makes Bitcoin unique is that its supply is truly fixed.

Only 21 million bitcoins will be issued in the world. Thus, given that there are about 47 million millionaires in the world, if each of them wanted to own even one bitcoin, all of them would not be able to purchase it.

These supply constraints make bitcoin bullish.

Gold, on the other hand, has been a store of wealth for 5,000 years and is a real physical asset. It has always had value in times of geopolitical uncertainty and has many commercial applications.

It is inert, making it perpetual, and as production declines and demand increases, we can assume that prices will rise.

Whether you lean towards digital or physical, at the heart of the debate is a general distrust of government, and in my opinion, rightly so. We’ve seen governments spend and print money at levels that are so far beyond responsible that we are left to watch and wait to see what happens next.

It’s maddening to watch currencies collapse around the world and regimes fail, but it only whets the appetite to find ways to keep wealth out of government hands. You have to ask yourself, what will be the tipping point?

The story of the value of gold coming full circle

When it comes to gold, we only need to look to history to understand its viability, but in addition to historical gold prices, our focus should be on the historical events that influenced those prices as we see things start to go in circles.

Gold has a very long history, but we’ll start with the signing of the Federal Reserve Act in 1913. At the time, the country was facing a shortage of money supply at the local bank level, and the idea of centralizing the banking system seemed like a solution to control the elasticity of the money supply.

Then in 1934, the government faced a shortage of money. So to increase supply, the Federal Reserve raised the spot price of gold by 69% to $35 an ounce.

(It is important to note here that at that time the dollar was backed by the gold standard, and in order to have more money, the price of gold had to be higher.)

This was not the kind of printing we see today, but it does show the government’s ability to manipulate currency.

I wrote about something similar to what the Romans did in my book Common Sense. Caesar Augustus trimmed the edges of gold coins to collect gold to create a new set of coins. The result was a smaller coin, with less gold, but with more coins to circulate. Well, we know how that turned out.

Stagnation, then inflation

Moving back to 1964, we see that the Dow Jones average was around 800, and 16 years later was still at 800.

There were many reasons for this decline: the Vietnam War, heavy tax burdens, rampant inflation, and the lingering possibility of nuclear war between the Soviet Union and the United States.

The combination of all these factors kept the economy from improving and the markets remained stagnant.

In 1971, the government faced another money supply shortage, and its solution was to get rid of the one thing that was holding it back: the gold standard. So the government abolished the gold standard and converted our currency to fiat currency.

This allowed what we today call the ability to print money without backing up the stated value with anything other than the creditworthiness of the government.

After the switch to fiat currency, gold began to steadily increase in value as the dollar depreciated, reaching an average price of $614 in 1980, up from $35 in less than a decade.

Growing economy hits gold

Then in 1981, the Economic Recovery Tax Act was passed, which started the explosion of wealth that lasted until the 1990s.

The law reduced taxes and regulation. The end of the decade saw the collapse of the communist Soviet Union, which sparked optimism about the future and removed the prospect of a nuclear threat or communist takeover.

With a more optimistic view of the economy, as demand declined, we saw gold prices decline, hitting bottom in 2001 at an average price of $271.

Then in the early 2000s we saw a return to a loss of confidence as a series of events turned the tide and resurrected past uncertainty.

The bursting of the tech bubble, the 9/11 terrorist attacks and the mortgage meltdown all occurred within eight years. The government turned the printing presses back on and free money began circulating in unprecedented form and hasn’t stopped since.

After the worst of 2008, the markets and our economy began to climb out of the gaping hole until the Tax Cuts and Jobs Act was passed in 2017.

From 2017 through 2021 (including COVID in 2020), markets grew 56% as a result of tax cuts and deregulation, allowing businesses to expand and hire more employees.

Back to the future

Today we see the government aggressively spending money, and if we look at other countries that have traveled the same path as we have (unlike the Romans), we see that it does not end well.

We must also keep in mind that there is a serious increase in tensions between China and the US, Russia and the US that are eerily reminiscent of the Cold War.

I mentioned earlier that we are coming full circle. What we learned from this history lesson is that the government’s appetite for spending money is insatiable and, as it turns out, is undermining our currency. This leaves the future of the markets, our currency and the future of our country uncertain as we sink deeper and deeper into uncharted waters.

With all that in mind, how about bitcoin vs. gold?

Which brings me back to the question, will bitcoin replace gold as the new safe harbor? Not possessing a crystal ball, I don’t know if it will happen, nor does anyone else. Honestly, I’m not even sure if it’s the right question to ask, but it’s an overwhelming question that can’t be answered without understanding the history of our currency.

With all the uncertainty around us, we certainly see a flight to safety, but if you’re a diversified investor, perhaps you should own both gold and bitcoin rather than arguing about which is better.

By focusing on things you can control, like your allocation, you can share in the profits and limit your vulnerability if things go wrong. Hence the diversification.

Proponents believe that bitcoin and its blockchain could well reshape the entire global financial network, based on the fact that bitcoin and blockchain, along with smart contracts and NFTs, are the most disruptive technological innovations since the advent of the internet.

Therefore, it can be considered to stand alone as an asset class in its own right, separate from gold.

If we compare the digital asset with gold, we can say that bitcoin is more convenient to own as it is accessible via the internet at any time.

However, gold, as a physical asset, can be held securely without fear of internet outages or the threat of hacking.

In conclusion, I would like to say the following: Gold has always been a store of wealth, and bitcoin may well become one in the future, but it is currently too volatile to replace gold.

Instead, look at bitcoin as the technology of tomorrow, knowing that tomorrow is closer than you think.

One of the most important things to consider before buying gold, bitcoin or other investments is knowing your risk tolerance.

Many people don’t know how to articulate their attitude to risk and often resort to ambiguous words to describe their tolerance.

This doesn’t have to be the case for you. You can get an accurate assessment of your risk tolerance for free by taking my risk assessment test here.