. By Ilir Salihi Owner of incomeinsider.org
Making comparisons is human nature. Pitting one thing against the other to see how it fares. And that’s fine, for the most part. That said, the gold vs bitcoin debate is one that might seem strange at first. On one hand, we have the safest of safe assets with a long history. On the other, we have an asset that many still consider unproven and is known for its unparalleled volatility. Understanding why these comparisons sprung into place is a good start on our long road of trying to find out whether one asset is better than the other.
Modern money: A tale of thin air
Something that most gold investors have in common is that they disdain how central banks approach the financial system, and with good reason. The more we look into how money is made, the more we are in disbelief and ask ourselves: is this really possible? Indeed, it seems strange that central banks have been getting away with it for the better part of half a century.
The U.S. now finds itself with $30 trillion in debt and countries de-dollarizing. It’s becoming a trend. The dollar might still be the global reserve currency, but it hasn’t been this shaky in that spot in a long time. And that is traced very easily to President Nixon’s abolishment of the gold standard in 1971.
In truth, it was more of a formal abolishment, but an important one nonetheless. The more stringent the gold standard was enforced throughout history, the more value, clout and faith the dollar it was tethered to command.
As you probably know, bitcoin was created during the financial crisis of 2008. Whether you believe in its origin story or not, its manifesto is pretty straightforward: banks need to be placed in check with a hard-capped currency.
Since gold was always about scarcity, bitcoin essentially immediately one-upped it with a fixed supply of 21 million. Gold might be scarce, but it’s not finite, like bitcoin.
There are many other similarities and “intended uses” of the decentralized digital currency that invoke the comparison, so let’s go over some of the main similarities and then cover the differences.
Gold vs Bitcoin: Similarities
Scarcity, scarcity, and more scarcity
We can discuss real market value all day long, but there is no arguing that scarcity almost automatically makes an investment value. This starts from how the investment is obtained or produced to how it’s distributed all the way to its supply and demand.
Just as anyone can tell you that obtaining gold is no walk in the park, bitcoin is becoming more scarce by the minute even though its supply isn’t shrinking. Rather, it’s becoming more difficult to “mine”: individual enthusiasts have given way to large, oftentimes massive industrial operations of bitcoin mining as the price of the token went up. Even if it was to fall to half of its current “gutter” price of $18,000, thereabouts, it would be exceedingly profitable to mine.
Both gold and bitcoin are somewhat difficult to obtain. In the case of bitcoin, you need some computer knowledge, hardware, and more than likely access to an exchange. The latter often put you through the same grinder that airline companies do.
The same is true for gold, regardless of whether we’re talking physical gold or derivatives, but we’ll focus on the former. Precious metals are infamous for their varying premiums and are generally almost impossible to get at a spot price.
Where are you going to buy physical gold? Are you getting a good deal? How will you store it? If you are buying derivatives, have you even really bought gold? So again, unlike cash or many other commodities, it’s a complicated acquisition on that front as well.
The general rarity of both assets is what gives them their appeal and value, though not the only thing. Even when gold was used as currency with no paper in circulation, it was still rare enough to hold value. And we suspect the same is to be expected if bitcoin ends up being a common currency of choice.
Both assets have tremendous upside
One thing nobody can seem to agree on is how much either gold or bitcoin is really worth. There are many calls about bitcoin going back to zero, or more specifically, “crypto back to zero”. But just as much, there are many finding no real value in gold. For every person that says gold has intrinsic value, you can probably find one that will ask: why does it?
This has brought on many debates about the prices of both assets, and fortunately for both, the consensus seems to be to the upside. Allegations with sound footing that gold price is being suppressed are almost ubiquitous. The view that the precious metal should be closer to $10,000 already as opposed to around $1,600 is fringe, but not overly so. The same is true for those saying “digital gold” should go for over $100,000 a token.
There isn’t really an argument against the latter forecast. Crypto is getting more popular, more people are pouring in a finite asset, and governments keep printing something with no cap. That something is being used to buy this fixed-supply asset. The investment advice almost gives itself.
This is tied to both rising inflation and price swings, and we’ll cover both independently. But for the purposes of this section, it’s enough to say that many believe each asset should be 10x in price and is almost guaranteed to appreciate.
Central banks hate both gold and bitcoin
This is an important point that can’t be overstated. In the case of gold, the relationship is a bit more nuanced. There are exceptions, but you generally won’t hear central bankers touting gold’s value, certainly not in the U.S. On the other hand, the World Gold Council is quick to remind our central banks’ stockpiles of gold bullion keep increasing.
Why? The reasons should be fairly obvious: most will agree that they’ve perpetrated a kind of con in the financial system, both with free-floating money and the overt shunning of gold. But while they try to make it look like gold left the financial system ages ago, their balance sheet tells us otherwise.
In the case of bitcoin, things are a bit different. Central bankers, at least not officially, can’t go and buy bitcoin because they’re essentially saying their currency sucks. They can buy things like forex or even gold for diversification.
But buying bitcoin, which was made to prove that central banks are destroying individual wealth, isn’t a good look. Interestingly enough, recent stimulus packages have actually brought on some unofficial debates about tethering the U.S. dollar to bitcoin. “How do we save its value?”
Just as Roosevelt made it illegal to own gold for decades, so too are many governments cracking down on bitcoin in varying degrees. The reasons are simple: both assets double up as a kind of currency that gives people autonomy and freedom. They are essentially a competitor to whatever sovereign is trying to ban or regulate them. And every clampdown just makes both assets look more valuable.
And, of course, the inflationary nature of currencies makes this all the more prominent. Here, gold and bitcoin are no different than other assets, such as commodities. They gain in value because the fiat currencies they are priced in a loss in value. And unless we see a drastic change in monetary policy, which we won’t, this will continue to be the case.
Gold vs Bitcoin: Differences
Bitcoin has people waking up in cold sweat
Whether you like the currency or not, this is something you have to concur with. Bitcoin investors, aside from the highest level of true believers, are never at ease. But once you get to that level of unquestionable faith, you might as well look to become a priest. Or a science professor.
Everyone else has some doubts. Is today another “crypto crash” day? What is the bear market, really? Where is the support? For example, we are in a bear market now around $18,000 a token. It could go to $1,800 feasibly. Yes, it will almost certainly gain everything back. But the psychological impact of a highly speculative investment can’t be underestimated.
Gold detractors will, during times of crypto bull runs, poke fun over gold’s comparatively lower gains. But gold is mostly about peace of mind. Barring some kind of apocalyptic scenario, it’s not losing in value by much. That’s just how things are. It’s this peace of mind that has many opting for the yellow metal over bitcoin even though both assets have merit. The volatility is just too much to handle for some.
Bitcoin isn’t as tangible as gold
Gold is an investment that stands on its own, quite literally. It’s a solid object that can be carried around, is easily recognizable, and is just as easily accepted by everyone. Bitcoin is essentially computer code. As credit cards have shown, computer code can be money. But not everyone is a fan of credit cards, either.
There are many ways to try and get around this. Many investors store bitcoin offline, on a digital ledger, which is really a tiny USB stick. An argument against bitcoin has to do with its blockchain network requiring electricity, power, and independent operators. But that doesn’t really make bitcoin go away. Even if all three were to lapse, bitcoin on an offline ledger would still be intact.
As we mention hardware ledgers, we also have to say that bitcoin is a lot more flexible than gold. An appeal of gold was always that a fairly small piece of bullion can hold a lot of value. Well, in the case of Bitcoin, a minuscule object can hold a staggering amount of value. So this difference is open to individual tastes.
Bitcoin caters to new investors a lot more than gold does
It’s stated over and over that gold has been around for centuries and that’s one of its biggest perks. And sure, it’s a valid argument. But that’s one way of looking at things. Another is that gold’s lengthy tenure in the financial system benefits “old money” investors a lot more than bitcoin does.
If you buy one 1oz gold bar, or ten of them, or a hundred, you might be satisfied. But you’ll soon realize that there are many with thousands, tens of thousands of these gold bars. Then we get to central banks… And as you go over this, you can almost start to feel like an insignificant investor in the gold market. Maybe, gold isn’t benefiting you all that much compared to others, says the voice in the back of the head.
Bitcoin is kind of abundant with 21 million tokens, but not that much, and definitely not compared to gold. Of course, wealthy investors scrounged these tokens up early on by the million. But with a single token, which is around the price of 10 ounces of gold, you still have some say in the market. This will become the case all the more as price increases. With gold, that’s not really the case. 10 ounces of gold are preserving your wealth and giving you some gains, but that’s where they stop doing you favors.
Gold benefits those who have hoarded it for decades or centuries, while bitcoin has an innate appeal to individual investors who’d like to get in on something new and exciting. Not to worry, as the first group made sure to get their BTC tokens early on.
Gold vs Bitcoin: Two complementary assets
The more we delve into these assets, the more we understand how they work in each other’s favor. There shouldn’t really be two sides trying to seek advice on which asset is better, because that would be like figuring out whether stocks are better than bonds. Each of them fulfills its purpose, and just as risky stock trading is giving way to risky crypto trading for many, safe-haven investors are moving away from bonds into gold.
Gold and bitcoin are probably the most talked-about assets these days. Investors are tired of stocks with overblown valuations in nations with crumbling economies. They’re tired of these economies issuing bonds with low or negative yields. And they aren’t too fond of holding their IOUs in the form of currencies.
Both gold and bitcoin represent a way, unique to each, to invest soundly without exposing yourself to counterparty risk. There is neither a need nor a reason to figure out which asset is better, because that comes down to your portfolio goals and orientation. However, unlike in the case of stocks and bonds, both assets are something that you can make an argument that everyone should want to own.
They have exciting markets with plenty of choices and the option to either “invest and forget” or keep daily track of them. They both appreciate over the long term regardless of what the headlines say. They’re both a form of disconnection from the financial system. Best of all? They’re both something that translates to money a lot more universally than any other individual asset or currency. And that alone is an argument to try and get your hands on a bit of both.
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