Market observers have been comparing gold and bitcoin for quite some time.
While both of these have proved helpful to investors, both have been harnessed as a speculative investment at some point in time and a safe-haven asset at others.
Although they’ve been compared quite a lot in the past, both Bitcoin and Gold have significant differences. They range from differences as simple as tenure to the very nature of these assets themselves. So it’s been determined that while gold is tangible, bitcoin is a digital creation.
If you’re considering investing in either of these two commodities, comparing and contrasting the two has proven to be essential.
In the following article, we’ll take a look at the similarities and differences between gold and bitcoin and which one proves to be a better investment.
Which one is more profitable?
Before we understand which is the more valuable investment between gold and bitcoin, we first need to understand the basics of the two. So let’s take a look at that.
Gold: The basics
For more than 2000 years, gold has been used as a form of currency. The supply of gold or what we can access increases when minors retrieve the precious metal from the ground.
Once the gold has been mined, it can be used in goods like jewellery. Additionally, investors may purchase the precious metal in many forms. It can be used to buy bullion, or to gain exposure to its price movements by using a wide range of financial instruments and gold futures.
Gold has generated immense attention as a safe-haven asset, quite frequently. The precious metal rose to an all-time high of more than 1,400 pounds in the latter part of 2011, reaching these levels as debt issues brewed in both the United States and Europe.
Bitcoin: The basics
Bitcoin, as you may already know, is a digital currency, and like gold, it is also created by mining, although the process is entirely electronic. Bitcoin miners verify transactions and combine those transactions into blocks which then make up the digital currency’s chain.
So new bitcoins are released every time a miner succeeds in completing a block. So these new bitcoins, under the protocol, are created every 10 minutes. And people can use these units of digital currency to make transactions. They can also use the units to invest.
Perhaps one of the most noticeable differences between gold and bitcoin is that while one is a precious metal, the other is entirely a digital product.
Also, both the current and maximum supply of bitcoin are known entities. More specifically, bitcoin protocol caps the total number of these digital currencies at 21 million, and people who are interested can find out how many of these bitcoins have been mined by looking online.
More than 16.6 million bitcoins have been mined since October 2017 and the remainder not expected to be mined for many years to come.
However, when it comes to gold, no one knows how much precious metal is left on the planet. Gold can be found on the surface of the earth and also exists in seawater. Lots of companies and even started working towards a space mining industry which could possibly gather the precious metals from space.
Gold also has a far greater tenure than bitcoin, as it was first used more than 2000 years ago. On the other hand, bitcoin has been mined since the first block was mined in January 2009.
Another striking difference in the two is that while gold is a commodity, classifying bitcoin has proven to be a bit more elusive.
Both gold and bitcoin have been identified as safe-haven assets at some point. Gold has long been identified in this way; however, bitcoin has recently become something that investors flock to in times of distress.
Both gold and bitcoin are speculative investments, so unlike stocks and bonds, they are not based on factors like earnings and interest payments. As for what motivates their price movements, the answer is quite complicated, and lots of people have different points of view on this. For example, gold has acted as a safe-haven asset in many cases but risen alongside riskier assets at other times.
In 2013, Federal Reserve Chairman Ben Bernanke told Congress that he was not sure what gold’s price determinants were nor did any really understand gold prices.
When it comes to bitcoin markets observers have provided various ways of valuing the digital currency. According to managing partner and head of research for FundStrat Global Advisors, Thomas Lee, it was stated in October 2017 that bitcoin would reach US$6000 by the end of the year. This forecast was based on the key role of usage, stating that as the number of bitcoin grew, so will the digital currencies value.
His prediction did come true, interestingly enough and bitcoin surpassed the US$6000 mark on 20 October 2017.
In a nutshell
There are a lot of awkward things about gold, and it all boils down to security and fear of loss which makes them tricky investments.
Gold is also worth about $60 million a ton and as such is an awkward asset to store significant wealth in. In the event that you are trying to protect yourself from a major disaster, gold is not going to do an incredible job.
In fact, even an asset weighing 100 pounds is awkward if its purpose is to protect the owner from war or other predation. Ideally, a haven asset has little weight because when the chips are down as they say in India, wealth is only what you can carry.
Gold has also stubbornly failed to go up hugely, irrespective of changes in the global economy. It has also not lived up to the expectations of many of its advocates.
However, it does seem to manage to jump $100 or two is something nasty kicks off somewhere on the globe. To make matters worse, bitcoin and other cryptocurrencies have been invented, and they dramatically intrude on key use cases of gold like flight capital and safe-haven investment.
This is also the simple reason why some investors have more upside when investing in bitcoin than when they invest in gold, and that is issuance.
Each year, there is another 3,300 tons of gold produced which we can call $200 billion of new gold that must be absorbed every year by buyers. When we look at bitcoin, at say $10,000 a coin, it is $6.5 billion of new supply that needs to be absorbed by the global economy.
So the reality is that bitcoin will go up a lot further and faster than gold will if the demand for haven assets were to suddenly spike.
So in this case, the upside for bitcoin is dramatically higher with the creation of coins halving every four years or so. Ultimately, this means that the price of bitcoin should react as the price of gold would if half the mines in the world closed down every four years and after 12 years gold output would slump nearly 90%.
So to sum it up, shrewd investors looking for long-term growth and hedges against the macroeconomic climate have more than one reason to consider bitcoin as part of their portfolio. In the battle of bitcoin versus gold, bitcoin clearly wins when it comes to value.
When it comes to which is a more volatile investment, it is debatable and has been debated for many years. So ultimately, it depends on your goals. Some people agree that bitcoin is a better investment but only for short term potential gain and likewise, you also have the potential to lose a lot of money.
When it comes to gold, lots of people see it as a more stable investment that is almost guaranteed to return on your investment in the long term.
- Safe in vault
- Can’t be used as currency
- Must be stored
- Easily sold
- Can be used as a currency
- Subject to scams
- Could create other cryptocurrencies
So while bitcoin and gold seem to have their advantages and disadvantages, there are lots of people that believe that bitcoin and other cryptocurrencies are too unstable to be substituted for gold.
According to the World Gold Council, bitcoin, as well as other cryptocurrencies, are too unstable to be substituted for gold.
According to some financial commentators and experts, digital currencies like bitcoin, could, like gold, become a safe investment in the future; however, new reports from the World Gold Council have conflicting statements.
According to them, gold is less volatile than cryptocurrencies, and its purpose in investment is also much clearer.
BTC as active investing vs gold as passive investing
When it comes to bitcoin and gold, you need to consider both active and passive investing. However, lots of people are not entirely sure exactly what is meant by the terms “active” and “passive”. So let’s take a closer look at that.
When we refer to “active” investing, it means that a human fund manager is literally picking and choosing the stocks, bonds or whatever commodity or asset you are trading. The aim is ultimately to beat the market.
When we refer to “passive” investing, it means that this type of investing uses a computer program to simply copy the market. While you have no real chance of beating the market, you also don’t pay a high fee to the human fund manager.
Ultimately the idea is that passive investing is a bubble which has arisen from the fact that they have become very popular and that people are seeing more and more of these funds popping up to take advantage of that fact.
Ultimately, when it comes to active or passive investing, be it with bitcoin or gold, it all boils down to personal preference. For many, it is a process of trial and error, and they tend to give both options a try at some point.
Both gold and bitcoin are investments that have commanded significant attention as safe-haven assets.
They have some noticeable differences, such as gold being physical and bitcoin being purely electronic. However, the two also have some similarities, and they are both speculative investments since the prices are not based on more basic fundamentals like revenue, interest payments and earnings.
However, before speculating on either gold or bitcoin, or even making a purchase, investors will definitely benefit from conducting due diligence. Also, bear in mind that risk is inherent to investment so you shouldn’t invest any money that you cannot afford to lose.
Last Updated on July 7, 2020 by Eito