Photo courtesy Alexei Raisa on Unsplash.
Everyone has seen and observed the precious yellow metal from their childhood. Their parents and grandparents would have told them the value of gold and the price appreciation they would have gained after keeping it for many years or even throughout their lives. This would have been the case through many generations and for hundreds of years people have found gold as a true store of value that can give inflation-beating returns. We will now do the Gold Vs. Bitcoin comparison.
This was well accepted and appreciated until Satoshi Nakamoto invented Bitcoin and released it in 2009. For a few years, the name Bitcoin did not evoke much attention but then it skyrocketed at such a fast pace, during the latter half of the last decade that people all over the world were taken by surprise. Seeing the success of early investors’ people began to pour money into Bitcoin and the other Altcoins. While most of the people from the older generation preferring the safety of capital stuck to investing in gold, the millennials, and Gen Z prefer cryptocurrencies over gold. The sharp price appreciation of Bitcoin and other Altcoins has now caught the attention of even Gen X and the boomers.
Several factors have made gold a safe haven asset. It is being used as jewelry, in electronics equipment, and even spaceships. There is a huge demand but the supply is low as it can’t be manufactured like other items and has to be mined. The central banks themselves hold large amounts of gold as reserves in countries around the world, knowing its value for maintaining economic stability.
Bitcoin has truly dimmed the shine of gold. The traditional way was to hedge the volatility of the stock market with gold which had proved to be effective over a number of years. But Bitcoin is challenging the old thought and has some unique features that could make it a viable haven.
The comparison of Gold Vs. Bitcoin is given below:-
1) Limited and rare assets-
The supply of both gold and Bitcoin is limited and the price depends on demand and supply. This is unlike fiat currency where the government can print more money. Both the asset classes are independent of the government. 90% of the Bitcoin is already mined in the last 12 years, which means out of a total of 21 million Bitcoins, 18.89 million have already been mined. The mining difficulty for the remaining 10% Bitcoins will increase and the last coin will be mined by 2140.
As for gold, some experts believe we may have already reached the peak of gold mining. But it will be a gradual slowdown of output from the mines over the next few decades.
Liquidity is the level of effort required to liquidate or sell an asset without impacting its price. The most liquid of all the assets is cash.
Gold has a large global market and there are always buyers and sellers available for gold. This could be banks, refiners, dealers, and common persons. There is always demand for gold be it for industrial or investment purposes. Therefore it is a liquid asset that can be bought at stable prices.
Bitcoin is also a relatively liquid asset and there are many exchanges around the world where traders can buy and sell Bitcoin. Spreads between the buy and sell orders are not large and an average trader does not suffer the effects of slippage.
3) Transparency and Safety-
There is an established system for trading, tracking, and weighing gold but some mistakes may hamper the process. Bitcoin is a decentralized currency having a trading system that is encrypted in a centralized ledger. Hence Bitcoin and cryptocurrencies fare better in the matter of transparency.
There is a limit for a common person to hold physical gold and if you keep it in your house there is always a danger of robbery. Cryptocurrencies are digital currencies where there is no such problem. There can be hacking attempts but the wallets try to provide security mechanisms. So you can be at peace about the safety aspects.
The price of Bitcoin and other cryptocurrencies fluctuate wildly as compared to gold whose price is not so volatile. This is because Bitcoin is still a nascent asset class and the factors that influence its volatility are its utility and scarcity. There is no stabilizing factor like a central government backing and there are social trends that influence its price. Many new investors start investing or trading hoping to make quick gains but when this does not happen they lose patience and sell their holding leading to price volatility.
Bitcoin has no intrinsic value and can’t be discounted like traditional valuation methods. The cryptocurrency movement sometimes follows the sentiment and narrative. If there is any bad news it causes panic leading to wild price swings. Blockchain operations are spread across a network of computers around the world making it difficult for any central authority to control them.
5) Baseline value-
Throughout history, gold has been used for making jewelry and now finds various applications in the electronics field, dentistry and is used even in spaceships. Bitcoin also has a baseline value. Thousands of people around the world lack access to banking infrastructure and Bitcoin could have a tremendous use as a value of exchange.
6) Impact on Environment-
Gold is extracted from open-pit mines where a large amount of earth and sand is displaced. To produce gold for a single ring it is estimated that 20 tons of rock and soil are displaced. This waste has mercury and cyanide that is used to extract gold from rocks, and the soil erosion affects streams and rivers that carry the marine ecosystem. Air quality also deteriorates due to gold mining as it carries a large amount of elemental mercury.
Bitcoin requires a large amount of energy due to the computation requirements for its mining. Much of it is got by burning fossil fuels. Bitcoin mining generates a large amount of electronic waste that includes specialized machines and hardware that become obsolete soon.
7) Government Regulations-
Countries around the world hold large amounts of gold as it is a safe investment option not affected by the changing political and economic situations. It has got intrinsic value and is accepted throughout the world. Central banks hold gold as insurance against hyperinflation and gold can be used to intervene when currencies are about to fail.
Governments across the world are pondering on how to regulate cryptocurrency. One day we hear that the government will regulate cryptocurrency in India and the other day there is a rumor that it will be banned. A crypto regulation bill was to be introduced in the winter session of the parliament which has now been postponed till early next year.
The rapid rise in the value of Bitcoin and cryptocurrencies has generated the interest of investing public around the world. But it is unlikely that gold that has been used as a hedge against inflation for thousands of years will suddenly lose all the ground to Bitcoin or the altcoins. Like gold Bitcoin is also seen as a long-term store of value with a fixed supply. Both the assets can coexist in an investor’s portfolio. A person can keep 5-10% of his investment in gold and a maximum of 5% in cryptocurrencies.