Gold and bitcoin are two asset classes that have myriads of die-hard believers who believe these assets are essential safe-havens. On the other hand, each of these assets also have a lot of critics who argue that one or the other is not a good investment at all. Many people have likened bitcoin to “blockchain gold” or “gold 2.0” and this begs the question – how similar are these assets? In as much as there are some similarities among these assets, there are also a lot of differences.
Gold’s history spans back many millenniums and across the globe. This precious metal was the earliest recorded metal employed by early humans. While the history of gold dates far back, bitcoin came into existence a little more than a decade ago. Gold is well known, and has passed the test of time while bitcoin is still in its experimental stage. In this article we will compare how these assets relate to each other and the variances among them and leave the question of which one you would prefer amongst these two.
How do Bitcoin and Gold compare to each other?
Tangibility and Transferability
Gold is a physical asset that can be molded into different shapes and sizes while bitcoin exists only electronically or digitally. This property gives bitcoin edge over gold in terms of transportation and transferability. Transferring gold from one location to another, requires moving tangible heavy metals around, while bitcoin can easily be transferred electronically to any place around the world, within minutes.
Although gold can wear away or become physically contaminated, it is quite durable if treated with care. Bitcoin is intangible and very much dependent on the internet and all the decentralized nodes in the blockchain protocol. If anything tampers with and kills the internet, that will be the end of bitcoin. But, as far as the internet remains, bitcoin remains just as durable as gold.
Gold can be divided into smaller pieces but it doesn’t always make much sense for smaller amounts. Bitcoin, on the other hand, can be divided into 100,000,000 satoshis, and this protocol can easily be increased in the future to support smaller amounts when the need arises. In as much as these two assets are divisible, bitcoin is more divisible.
Fungibility simply implies a situation whereby two things are identical in specification, where individual units can be mutually substituted.
It is true that one can exchange any weight of pure gold for another similar weight of pure gold, but of course, it’s very difficult to melt down the exact amount you need for a pizza. This simply means that breaking down gold into small units that can give exact value or weight of another gold is close to not feasible. Bitcoin has its shortcomings in terms of fungibility. Since bitcoin has its historical data which is installed on a decentralized ledger, it is quite easy to track the movement of bitcoin from person to person. This means that bitcoins owned by particular people can be tracked and blacklisted. As it stands, neither gold nor bitcoin is perfectly fungible.
The scarcity of gold is well defined, as it lies on how much mining occurs as new gold is added to the existing supply. There is a popular saying that gold doesn’t grow on trees just as bitcoin is not minted at will on the internet. The bitcoin protocol has a finite supply of 21,000,000 units, and this includes all the bitcoins that have been lost through loss of wallet private keys. It is practically impossible to change the protocol of bitcoin in order to mint Bitcoins exceeding its maximum limit. Gold and bitcoin are quite scarce, but bitcoin has the tendency of becoming more scarce in the future, primarily as a result of the limit on its supply.
Gold can easily be counterfeited and there is the need for purity tests when dealing with gold. This feature may be tricky to novices. Bitcoin cannot be faked and it is quite needless to verify the authenticity of bitcoin based on the blockchain. Bitcoin is more resistant to counterfeiting than gold.
Ability to serve as a safe-haven
Gold and bitcoin have been tipped as a safe-haven for investors. Gold has been viewed this way for a long time while bitcoin came into limelight as an alternative investment opportunity. While bitcoin is highly volatile and can make outrageous movements within seconds, gold is more stable and this makes it a better safe-haven for hedging funds in times of economic uncertainties.
Bitcoin and gold investments are not based on factors like earnings and interest payments, unlike bonds and stocks. These two investment classes are purely speculative. Many proponents of these investment classes suggest that their values are driven by law of demand and supply, while some believe that the value of these assets lies on the mercies of big players who manipulate their values at will.
The state of Gold and Bitcoin in the COVID–19 Pandemic
The COVID–19 pandemic has negatively impacted the world’s economy and this has pushed many investors into a dire search for alternative investment opportunities. Gold and bitcoin have seen an increase in interest during this period. According to Marc Fleury, Chief Executive Officer of crypto asset management and financial technology firm, Two Prime, “Crypto markets have done well during the Covid-19 crisis partly because Bitcoin becomes a refuge, like gold, when risks multiply”. Cryptocurrencies have been reckoned as the best performing asset of the commodities.
For instance, the Bloomberg Galaxy Crypto Index of digital coins is up by about 65% in 2020, exceeding gold’s jump of more than 20% as well as returns from global stocks, bonds and commodities.
Store of Value
One of the hottest arguments between believers of these assets is; which of these assets is a better store of value? An asset is said to be a store of value if it can retain its purchasing power in the future. Gold and bitcoin are generally believed to good stores of value. But it’s indecisive when you ask most people which among these is better, as despite the frequent level of volatility exhibited by bitcoin, the growing correlation of these two assets is high.
Gold and bitcoin are assets that have captured the attention of many, as alternative investments. They have significant variations as well as similarities. They are similar in the sense that they are speculative investments. Gold differs from bitcoin by being a physical commodity, whilst bitcoin only exists digitally.
Which one do you prefer? Gold or Bitcoin.