With its attributes and characteristic features, many believe that gold can be best compared with Bitcoin to adjudge the value of the crypto coin.
For thousands of years gold has been used as a reliable and traditional medium of exchange. This is because it can be used as money.
Gold is even better than comparing Bitcoin with fiat money because the value of fiat money is continuously changing.
This is because fiat money is being printed on a regular basis and will probably never stop, which means its supply will continue to rise tremendously.
Like Bitcoin, gold too has a finite supply and cannot be manipulated to achieve monetary objectives by the governments.
Though gold has lost its luster since governments freed themselves in the 1970s from the monetary responsibilities imposed by it, gold is still an asset that is much more similar to Bitcoin when it comes to use cases and respective properties.
- Gold vs Bitcoin: The Similarities
- Gold vs. Bitcoin: The Differences
- Which One to Buy – Gold or Bitcoin?
Gold vs Bitcoin: The Similarities
With the experiment with fiat money almost coming to an end after four decades, the search for a new currency is on.
At this point when a change of guard is due, it is time to know whether Bitcoin, the most commonly used digital currency, can take over successfully.
Here are the similarities, differences, and the roles of gold and Bitcoin in the post-fiat world. First, take a look at the similarities.
1. Limited Supply
Both gold and Bitcoin cannot be hyper-inflated because both have a limited supply, which is one of the most significant and obvious similarities between the two assets.
Unlike fiat currencies that can be printed at will to increase the supply as and when needed, both gold and Bitcoin have well-quantified supply due to the restrictions and inability to introduce more of them into the economy.
As for Bitcoin, the supply is limited to 21 million only. The mathematical algorithm cannot manipulate or increase this number.
On the other hand, as for gold, the annual supply as well as the total supply of it is limited to the availability of it from the natural gold quarries. It is 250000 metric tons and is continually dwindling.
This specific factor makes both gold and Bitcoin quite valuable to invest in.
A few economists criticize both gold and Bitcoin for their deflationary nature. It is, however, due to the limited supply of both, as mentioned above. These economists believe that this attribute of gold and Bitcoin creates ‘liquidity traps.’
The idea behind it is that people usually tend to hoard them both when the value of money rises constantly. There will be no one loaning or spending it which means that the businesses will not be able to sell goods which, in turn, imply that they will be unable to raise the capital required for increasing their production.
A different school of thought, however, looking at it from a different perspective, suggests that deflation is not a bug but just a natural feature of money.
Over time, this will make goods and services cheaper. This will also help in wiping out bad debts and investments quickly and with an increase in wealth due to hoarding, the money can be used most efficiently and directed into more productive channels.
Though the sales may experience a slump, the fact that the price of goods and services will be lower will offset the cost of production and therefore the businesses will not suffer much.
Both gold and Bitcoin, no matter how strange it may sound, have no central authority to keep them together. There is no specific owner for both because gold, as such, is a part of this planet and on the other hand, as for Bitcoin, this is ideally open source software that can be maintained by a network and anyone can make a transaction using this crypto asset.
Unlike fiat money, there is no way to attack or manipulate these two specific assets at their respective sources. Being decentralized in nature, even if it happens, it will cause a significant amount of financial loss for the attacker. Apart from that, it will also result in a rise in the perceived value of both these assets once it can resist such attacks.
4. Counterparty Risks
Gold and Bitcoin both are subject to minimum counterparty risks. This is much unlike fiat currencies in all their forms which have been subject to loss of value due to excessive monetary manipulation, uncontrolled government spending, and hyper-inflation.
As for gold, there is no chance of it even if there is a sudden and significant increase in its supply, for example, due to the discovery and introduction of a new and radical mining technology or an asteroid! This is because gold can be debased, though only theoretically.
In the same way, Bitcoin can also be debased if there is some error found in the code, or if the output of the network falls down due to an alternative digital currency, or even due to a 51% attack.
When it comes to gold, it is quite difficult, if not impossible, to confiscate gold technically through laws. Similarly, it is also not possible to confiscate Bitcoin through scams, threats, torture, or viruses.
However, there may be a few instances of it but those are practically isolated cases if you consider the larger picture as well as the system on the whole.
The fact is that gold and Bitcoin cannot be confiscated easily just like the highly interconnected financial assets or other derivatives in the financial sector.
For example, the European debt crisis and irresponsibility have left a lasting and significant ramification on the monetary system of several countries. Also, the confiscation of bank deposits in Cyprus has also proved that confiscating fiat currency is much easier than confiscating gold and Bitcoin.
6. Anonymity and Privacy
Both gold and Bitcoin transactions offer much more anonymity and privacy in making transactions in comparison to the fiat currencies. This is why more and more people all over the world are placing more importance on these two assets.
In fact, the fact that you can make anonymous transactions with Bitcoin is a huge plus for those specific people who are living under regimes.
However, there is no denial of the fact that there have been instances where such anonymity in transactions has resulted in a few illegal activities taking place, which is surely a negative aspect in some cases, but then, once again, these instances are quite rare.
In the same way, gold transactions can also bypass a few financial and organizational structures just as it has been observed in the gas acquisition case of Turkey from the sanction-struck Iran.
The origins of both gold and Bitcoin seem to be quite mysterious.
Though you can identify the source of gold, it is quite hard to find out the origin or the point specifically as to when gold became such a valuable asset. Few historians say that it dates back to the age of the Egyptians.
Whereas, a few others point out the legends from all over the world when gold was adopted, though slowly, as the most important and valuable form of medium of exchange in the world.
On the other hand, Bitcoin, though it came into existence just 11 years ago, the birth of it is quite speculative and mysterious. Few believe that the creator of Bitcoin was a person named Satoshi Nakamoto, who wanted to stay anonymous.
The coin made it big when Satoshi and a specific group from the forums were seen frequently making contributions. Also, there are a few specific segments among the users now who even think that it could be the conspiracy of a secret government organization, or a group of famous people.
When it comes to the acquisition of gold and Bitcoin, it is not like fiat money which, literally at times, does not even need paper to exist. It can be represented simply by a few numbers digitally on a computer screen. Both Bitcoin and gold, on the other hand, need to be mined to acquire them.
As for gold, when it is mined, it involves a lot of labor, planning, machinery, time, and research. All these involve a certain amount of money.
Similarly, as for Bitcoin, though it may not be mined physically in nature, it needs a lot of computing power to work with the mathematical algorithms and solve the problems to unlock and create new blocks of Bitcoin in the blockchain.
Once again, all these are real world resources that are required to generate Bitcoin and all these need a lot of money.
9. Some Other Similarities
As such, apart from the major similarities mentioned above, there are a few other similarities between gold and Bitcoin at the surface level which, when known, will also help you a lot in determining the right asset to invest in.
Both Bitcoin and gold are considered to be alternative types of money. Each of these assets is also considered to be a safe-haven investment due to its limited supply, much unlike fiat currencies.
You can use both gold and Bitcoin along with other crypto coins to make international transactions between parties residing across borders.
Over time, the supply growth of both gold and Bitcoin will slow down till it reaches a fixed amount eventually.
Gold is considered to be the king of the metals and similarly, Bitcoin is considered to be the king of crypto coins having a higher level of trust and value in comparison.
Gold vs. Bitcoin: The Differences
When it comes to the differences between gold and Bitcoin, the most significant one is in their intrinsic value, which however is quite subjective because nothing has intrinsic value technically. However, it is based on the fact whether it can be used in an industrial setting.
Gold has every attribute and feature that fulfills this definition providing it a lot of intrinsic value. It has a lot of different use cases such as in jewelry making as well as electronic production all over the world.
The main reason behind this is that gold is highly malleable, extremely ductile, and quite noble and is non-corrosive.
Bitcoin, on the other hand, typically does not have such possibilities and applications in an industrial setting and therefore lacks intrinsic value in comparison to gold.
When it comes to divisibility, Bitcoin can be divided into small fragments, as many as 8 decimal places. These individual small fragments are called Satoshi.
The most unique aspect of Bitcoin is that in spite of its divisibility up to 8 decimal places, there is still some more room to increase it even further. This means that it is very easy to separate each unit of Bitcoin while sending or receiving it. These add to the convenience of using Bitcoin as a currency.
On the other hand, gold is also divisible. In fact, there are gold credit cards that can be broken into multiple small pieces termed as gold CombiBars.
However, the truth is that gold is not as technically flexible as Bitcoin to segregate into several smaller pieces and therefore is quite different from Bitcoin.
11. Wealth Preservation
When you look into gold and Bitcoin from the wealth preservation perspective, a significant difference will also be seen.
According to the age old history of gold which dates back to thousands of years, gold has enormous wealth preservation ability. This is not only due to its enviable track record as a valuable medium of exchange but also for the significant role that it plays in the financial system.
It can perform well as a reserve asset without deteriorating in value due to its long life. Gold will preserve your wealth regardless of the condition of the world, whether it is during World War, any political crisis, immense financial crisis, or any other external events.
In contrast, the same thing cannot be said for Bitcoin. This is primarily because it is very new in the block and does not have a history to experience such setbacks and prove its endurance.
Moreover, most of the time, you will need a strong internet connection which may break it down by an unknown bug. Therefore, you cannot emphatically and confidently say that you can hold on to it for the following 50 years or more and pass it on to your grandkids with the same value.
Moreover, due to the continual development in technology, Bitcoin may be out from the competition due to a better alternative and technological implementation.
When it comes to trading with a currency or an asset, fluidity plays a significant role. This is one aspect where Bitcoin outshines gold. This fluidity gives Bitcoin its strength to outperform other competing currencies, especially gold, when it comes to a means of exchange.
You can easily and quickly send Bitcoin across the globe to any person who may be living in a region where there is no banking facility or infrastructure.
You can actually send them any time of the day and from anywhere practically for free – which is something that gold or any other major currencies cannot claim to offer at this specific point in time.
When it comes to gold, it is extremely cumbersome and practically a hassle to trade with using it as a currency.
This is due to the fact that such trades need to undergo a lot of strict rules and procedures that include and are not limited to spot appraisals of the gold, proving authenticity and legality, accurate measurement of its weight and a lot of other factors.
All these combined make the trading process quite complicated and lengthy at the same time.
13. Some Other Differences
A few other small differences between gold and Bitcoin are also worthy to mention here.
For example, in terms of market cap, though the standard units are a bit arbitrary, the total market cap of gold or its total dollar value is nearly $11 trillion. In comparison, the market cap of all of the cryptocurrencies including that of Bitcoin is just under $2 trillion at the time of writing, though it is increasing daily.
Gold is considered to be the money of the past while Bitcoin and other crypto coins are considered to be the money of the future.
Gold can be touched and therefore is considered as a tangible commodity. In contrast, Bitcoin, just like any other crypto coins, does not have a physical form but exists only in the digital blockchain. Therefore, these are considered to be intangible assets.
Gold has thousands of years of history and has been used for trading since ancient times but Bitcoin has been around only since 2008.
In terms of value, gold has more reliable and durable sources but when it comes to Bitcoin it is entirely based on the perception and its potential like the fiat currencies.
Gold is quite impossible to be substituted by an alternative. Mainly, it is due to its use cases. Apart from being used for ornamentation, it can be used as a catalyst in chemical reactions, the production of electronic goods, and in several aerospace and medical settings.
With its higher store of value and larger industrial and technological applications it is not possible to substitute gold with other similar precious metals. But Bitcoin can be easily substituted by any other crypto coin such as Ether, Ripple or hundreds of other Altcoins.
Bitcoin has more volatility in comparison to gold. This means that the price swings affect its stability significantly. Gold, on the other hand, is not as volatile as Bitcoin and therefore it can retain its purchasing power for a long, long time in spite of the ups and downs.
Due to the electronic nature of Bitcoin, it is much easier to liquidate. All it needs is a few keystrokes and can be done any day, any time using a computer or a smartphone.
Gold, on the other hand, needs to be traded within a specific time when the market is open and it may take some time to complete a trade since it needs to be assayed for authenticity and purity.
In terms of price appreciation, Bitcoin has surpassed gold by several points, whereas that of gold has been pretty steady over the period. This makes the potential growth potential and gains of Bitcoin undeniable.
Gold is natural and cannot be created but only extracted. This is a wonderful creation of supernovas billions of years ago. No alchemy can create gold though there have been several failed attempts made, which is good for savers but bad for governments.
However, Bitcoin, or crypto coins can be created and issued by companies and individuals to manipulate the supply. In fact, Bitcoin was created out of chaos due to market volatility and panic in 2008.
Finally, trading, proving ownership or storage of Bitcoin does not need the supervision of any central authority. In contrast, gold storage and trading involve several governing bodies. Proving ownership of gold can be done through purchase bills, warehouse receipts, court orders, insurance and more.
Which One to Buy – Gold or Bitcoin?
When it comes to your investment purposes, you should ensure that your portfolio is safe and productive. For that, if you need to choose between gold and Bitcoin, you should have an in-depth knowledge of them both and then make your final choice.
Gold, as you may know, is dug out from the earth and forged in flames to give it a physical form and it has weight. Bitcoin, on the other hand, is a purely digital currency that exists only in bits and bytes created by computers and involves complex equations.
However, there are lots in common between these two assets and in fact Bitcoin mimics some of gold’s unique and natural properties. For example, you can mine Bitcoin just as gold is mined.
Due to these similarities, both these assets appeal to the investors and their differences can influence the purpose of the investor’s portfolio.
Now that you know the similarities and differences between gold and Bitcoin, you should know their respective roles in portfolios as well.
Though Bitcoins and other Altcoins are powerful innovations and complement to cash and precious metals in several different applications, these cannot be considered as an effective replacement for cash.
Therefore, in spite of the rapid adoption of digital currencies, it is clear that there is a place for both in the real world. It is for this reason you should contemplate on investing in both since none of them are going away soon.
But how, that is the question. For that, you will need to find answers to different other questions first, such as:
- What are the unique properties of gold and Bitcoin?
- What are the realities of bearer instruments?
- What about the anonymity, or the lack thereof, in investments?
- What about volatile and stable investments?
- Is Bitcoin actually money?
- How crypto competition may hurt the value of Bitcoin?
Based on the answers, you should choose an asset that is a safe haven. Gold is, because it is scarce, it is valuable, and its supply is low irrespective of its demand.
It cannot be manufactured like federal banks print money or companies issue shares. The price of gold is consistent and rises as well and it performs quite well during corrections making it a useful and effective hedge.
Bitcoin is a blockchain-based, decentralized cryptocurrency that involves the collective computing power of the individuals and groups of people, who mine it, verify the transactions made within a network, and are rewarded over time.
Like gold, it cannot be printed or inflated and is therefore rightfully termed as the new digital gold. The blockchain technology is innovative and very exciting but it cannot be considered as safe as gold because there are issues to overcome and the users are not well defined.
Bitcoin is good to buy due to the fact that it has a maximum supply of only 21 million coins in circulation. Therefore, it will grow gradually and at a more predictable pace since it cannot be manipulated.
Gold, on the other hand, is good to invest in because it is considered to be a much better wealth preserver than Bitcoin which simply is a better means of exchange. Therefore, if you consider gold to be ‘money,’ Bitcoin is just a ‘currency.’ Gold is also good to buy due to the following reasons:
- It is an effective hedge and sound money against inflation.
- It helps in preserving wealth in the long term and its value will not erode over time or due to myriad diverse market conditions.
- It is valuable and has better use cases even in electronics, scientific research, artwork, and jewelry.
- It has a very strong global market.
However, experts suggest that you invest in both, regardless of what is said in the media. Experts say that holding both assets in your portfolio will help in diversifying your portfolio. If it is healthy, the overall performance of the portfolio will be much better. This is because the investments as such will not be correlated highly.
This means that the prices of the assets will seldom move in the same direction. This will save your portfolio from experiencing the adverse effects of a downturn in the markets which may decrease the total value of it.
It will not be heavily concentrated but more balanced to ensure the changes in the market since you will not put ‘all of your eggs in the same basket.’
The experts suggest that people should not rely too much on the opinions and implications that Bitcoin will one day replace gold as well as the fiat currencies to become the one and only monetary standard of the future.
This concept is highly contested and a matter of debate because it has little or nothing to do with what gold is capable of doing in the future or for the purposes for which it is used in this world today.
They also opine that the mistake is in the line of thought and strongly oppose the fact that the ascension of Bitcoin does not naturally forecast the demise of gold or vice versa. Therefore, these two assets can very well exist side by side in the financial system of the future.
Most importantly, gold and bitcoin are not only non-correlated with each other but also with all other assets. Therefore, owning both gold and Bitcoin is the best approach to make profits as well as to add more diversity to the investment portfolio.
Comparing gold with Bitcoin for their similarities and differences will help you to put things in proper perspective. You will then be able to know which you should invest in after knowing which is better suited to replace fiat money in the future.