Jerome Powell: Bitcoin & Gold Are Not in Competition With the Dollar

During a recent interview, Federal Reserve Chairman Jerome Powell said Bitcoin is “just like” gold and is not competing with the U.S. dollar.

Not long after his comments, Bitcoin surged to over $100,000.

During the New York Times DealBook Summit on Wednesday (Dec. 5), an interviewer asked Powell if he thought the recent surge in the price of Bitcoin represented a loss of faith in the U.S. dollar and the Federal Reserve system more generally. Powell answered, “I don’t think that’s how people think about it.”

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He emphasized that people use Bitcoin as a “speculative asset.” He went on to assert that the cryptocurrency is “just like gold, only it’s virtual.”

“People are not using it as a form of payment or as a store of value; it’s highly volatile.”

And he emphasized, “It’s not a competitor for the dollar.”

“It’s really a competitor for gold, that’s really how I think about it.”

Bitcoin has surged from $69,363.70 to over $100,000 since Donald Trump’s election victory. The cryptocurrency is up 133.87 percent this year.

Gold has also had a strong year. Despite selling off with the “Trump shock,” it is still up over 28 percent on the year.

With a market capitalization of $1.92 trillion, Bitcoin has surpassed silver as the eighth most valuable asset in the world with a market value of $1.75 trillion. But it is still far behind gold, with a market value of nearly $18 trillion.

Is Powell Right About Bitcoin and Gold?

Let’s break down Powell’s comments and see how they stack up against reality.

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He’s correct in that Bitcoin behaves more like a speculative asset than a currency. It has generally correlated closely with tech stocks.

Powell is also correct to note the volatility of Bitcoin. While the price of Bitcoin has been generally upward over time, it tends to be extremely volatile in the short term.

Since its inception in 2009, Bitcoin’s price has experienced dramatic swings. Starting at fractions of a cent, Bitcoin reached $1,000 in 2013, signaling its potential as a financial tool. However, this milestone was followed by a sharp correction. By 2017, Bitcoin had surged to nearly $20,000, attracting both institutional and retail investors. This was followed by a dip to $3,200 in 2018. In 2021, Bitcoin soared past $60,000, driven by macroeconomic factors like inflation and institutional adoption, only to dip again back into the 30s.

In 2021, Bitcoin’s annualized volatility was approximately 81 percent. However, volatility has decreased modestly as the market has matured. Recent data indicates that its 30-day annualized volatility has remained below 80 percent throughout 2024.

But is Bitcoin “just like gold?”

The simple answer is no.

Gold is not a speculative asset. It is widely viewed as a safe haven hedge and a store of value.

Bitcoin has not historically served as a safe haven.

For instance, Bitcoin failed as a safe-haven hedge as the markets tanked in 2018, instead correlating more closely with other risk assets. The cryptocurrency’s performance was down on par with tech stocks, falling 55 percent in the fourth quarter along with the stock market.

Meanwhile, gold was up significantly in the same period.

The fact of the matter is, gold and Bitcoin don’t tend to correlate at all. A Bloomberg report noted, “The average long-term correlation between Gold and Bitcoin has been close to zero, which makes both together additive to multi-asset portfolios.”

Clearly, Bitcoin and gold aren’t “the same.” They are different assets that can both boost a diversified portfolio.

Challenging the Dollar

Powell’s argument is internally incoherent.

Powell lumped gold and Bitcoin together to argue that neither competes with the dollar. But gold is clearly a competitor with the greenback because it is money. That means insofar as Bitcoin and gold are “the same,” Bitcoin is competing with the dollar as well.

And while they are very different assets, they do share some characteristics.

Gold has served as money for over $5,000, and Investopedia characterizes gold as a “currency” today.

“Under a free market system, gold is a currency. Gold has a price, and that price will fluctuate relative to other forms of exchange, such as the U.S. dollar, the euro (EUR), and the Japanese yen (JPY). Gold can be bought and stored, but it is not usually used directly as a method of payment. However, it is highly liquid and can be converted to cash in almost any currency with relative ease.”

With the advent of electronic payment systems, it has become much easier to use gold in small transactions.

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If gold is a currency, then it is competing with the dollar. (And it’s winning, too, as evidenced by its constant appreciation in dollar terms.)

That gold is money is also evidenced by the fact that central banks are aggressively increasing the amount they hold in reserves. Year to date, central banks have bought a net 694 tons of gold. Over the last 12 months, central banks have increased gold holdings by an average of 26 tons per month.

Meanwhile, the number of dollars held in central bank reserves continues to decline, falling 14 percent since 2002.

Gold is literally replacing dollars as a reserve asset. If that’s not competition, I don’t know what is.

Bitcoin is similar to gold in at least one sense – it can also function as money. It has a price and can be quickly converted to other currencies. It can also be used directly in transactions, although its volatility and transaction costs have limited its use in that capacity.

Both Bitcoin and gold have another similarity that makes them both superior to government fiat money. They can’t be printed by the central bank.

The Federal Reserve can create new dollars at will. This money creation (inflation) supports the U.S. government’s prolific borrowing and spending. In effect, the Fed is the engine that drives the massive federal government.

The constant money printing necessary to sustain government spending is precisely why the dollar continues to lose purchasing power month after month.

This is impossible with both gold and Bitcoin. The creation of new Bitcoin is limited by its algorithm, and the creation of gold is limited by nature. The restraint gold put on money creation was precisely why the U.S. government went off the gold standard.

So, Powell is wrong on both counts. Gold and Bitcoin aren’t the same. But insofar as they are similar, they are both competing with the dollar.

Given the superiority of both Bitcoin and gold as money, it’s no wonder Powell wants to downplay this competition.