Both Gold and Bitcoin can be considered safe haven assets and diversifiers. There are multiple similarities and differences between Gold and Bitcoin, hence a comparison is most appropriate.
Content
- Gold and its history
- Bitcoin and its history
- Similarities between Gold and Bitcoin
- Differences between Gold and Bitcoin
- Which is better: Gold or Bitcoin?
- Conclusion
Gold and its history
We will begin our comparison between gold and Bitcoin talking about the yellow metal. Gold is a relatively expensive metal if we want to buy it in bulk. But gold is much more than that.
Although usually treated just like any other commodity, gold is also real money. Unlike US Dollars, Euros or Pounds, which are nothing more than fiat currencies.
In fact, gold is said to be God’s money. Gold has been used as money for at least 5,000 years. It has been accepted by all societies and civilizations throughout history. And, thanks to its durability, the gold we use today is the same gold used during ancient times. Gold is the recycling asset par excellence.
Ancient and medieval societies used gold as money because they knew it had intrinsic value. Its value did not depend on any government telling citizens what to use as money.
Ancient civilizations had already experimented with fiat currencies. From the Egyptians to the Romans and the Greeks, all of them experiences episodes of currency devaluation. In the end, people always went back to trusting precious metals.
Since the 16th century, banks began to be created in Europe. They allowed people to deposit their gold safely. And, in return, they received gold ownership certificates.
Subsequently, these certificates began to be used in commercial transactions, precisely because they represented gold. The gold standard was born. Instead of using money directly, people used paper representing gold.
The gold standard is a system in which a currency is backed by gold. That means there is an official exchange rate between gold and that currency. Holders of that currency have the option to exchange it for physical gold at any time.
Until 1971, the global monetary system used the gold standard. That ended when US President Richard Nixon declared the end of the dollar’s convertibility into gold.
The problem started decades earlier when the United States began to print a huge amount of dollars for which it had no physical gold to back. In the 1960s, many foreign nations handed in their US Dollars in exchange for gold. The United States saw its gold reserves going down constantly.
As a result, since 1971 the value of national currencies is no longer tied to gold. That has allowed governments to issue a lot of currency, finance ever-increasing spending and debt levels have soared.
A bigger money supply has led to a rising cost of living and many of the issues the world has suffered from for decades.
Despite those changes in the monetary system, gold has remained the quintessential safe haven asset held by national central banks. They know full well there is only one monetary asset they can trust in the long run: gold.
For investors, the end of the gold made gold just another asset to invest in. An asset that, even though it no longer had a link with national currencies, was ideal to hedge against monetary devaluation and a higher cost of living in the future.
Bitcoin and its history
Next step in our comparison between gold and Bitcoin is a brief introduction to the cryptocurrency. Bitcoin is a cryptocurrency launched in 2009 by an unknown creator (or group of creators) under the name Satoshi Nakamoto. Its acronym is BTC or XBT.
Bitcoin is a fully electronic currency that is not managed by any one country. That means it does not have any central bank in charge of it.
Bitcoin uses an innovative technology known as blockchain, which consists of a digital ledger in which all transactions made with Bitcoin in the world are recorded. This is done in a decentralized way on the internet.
Thanks to its encryption, its system allows all transactions to be anonymous. No government can access the transaction log and identify who has exchanged Bitcoin with whom.
Consequently, it has often been said that it was the ideal payments system for those who wanted to make transactions without the authorities learning about it.
The amount of Bitcoin is limited to 21 million units. And that is precisely one of the biggest features of the cryptocurrency: it cannot be created out of thin air, unlike national currencies.
Proponents of Bitcoin advocate that money is not something we can trust governments with. Governments often abuse their power, creating inflation and quietly stealing purchasing power from the population. By using a currency with a fixed amount, that is no longer possible.
Most Bitcoin proponents are also proponents of gold, since both represent forms of money that cannot be created out of nothing. However, they believe Bitcoin to be superior to gold thanks to the fact that Bitcoin transactions can be made online.
While transactions in gold may require intermediaries, that is not the case with Bitcoin. Bitcoin lives on its own network, so there is no need for any intermediary. Hence, it does not have any verification needs.
Bitcoin has been one of the most popular assets since its inception. Its initial price in 2009 was less than one cent. In 2013, it surpassed the $1,000 barrier for the first time. In 2017, its price got close to $20,000. And, in 2021, it almost touched $70,000 before starting to go down.
It is undeniable that Bitcoin has been gaining popularity since 2009, despite the efforts from government, regulators and central banks to discredit edit.
Because gold and Bitcoin can serve many of the same purposes, a comparison between the two assets is required.
Similarities between Gold and Bitcoin
An important part of our comparison between gold and Bitcoin is to see those things they have in common:
Hard money
The term “hard currency” has been used to describe currencies that are able to maintain most of its value in the short term. They still lose value, but more slowly. For example, the Swiss Franc, the US Dollar or the Euro are considered hard currencies.
However, both gold and Bitcoin can be considered “hard money”. Hard money is obviously better than hard currency. Their value over time does not go down. If anything, it goes up.
Gold and Bitcoin cannot be created by governments or central banks. Hence, they cannot be devalued unilaterally with the sole purpose to advance someone’s agenda.
Out of government control
We have said it multiple times, but it deserves to be repeated. Probably the most important characteristic that gold and Bitcoin have in common is that they are outside of government control.
It is true that governments may try to influence and meddle with the price of both assets. But they are unable to control them directly. And, thanks to that, they are much fairer assets.
Think about the current monetary system, based on the US Dollar. If a country has debts denominated in a currency it does not control, it will have to declare bankruptcy, restructure its debts and implement painful measures.
However, if it is the US government, or another government in charge of a hard currency, is in trouble, they do not face the same consequences.
In such a case the Federal Reserve or the relevant central bank shows up and bail out the government’s finances. As a result, there is no fairness between countries in our monetary system.
And even within a country, the fact that the currency is in the hands of the government ends up leading to unfairness. If a citizen or a small business cannot service their debt, they will suffer serious consequences. However, if a local government, a large corporation, or the financial sector have problems, central banks come to their rescue.
By adopting gold or Bitcoin as currency, this unfairness between and within countries would disappear.
Limited supply
The total amount of Bitcoin is limited to 21 million Bitcoins and cannot be increased. In fact, the effective amount is less than that figure, since quite a good number of Bitcoins have been lost over the past few years, because many people have been unable to access their digital wallet after having lost their passwords.
Some 4 million Bitcoins are rumored to have been lost. That means that, once all the Bitcoins have been mined (there are still about 3 million Bitcoins left to mine), the amount available will be 17 million.
As far as gold is concerned, the amount of gold is also limited, for physical reasons. Gold has its origin in a handful of meteorites that hit our planet about 4,000 million years ago. So, unless more such meteorites comes, the amount of gold will never increse.
It should be noted that gold can be found and mined. This means that the amount of gold available increases every year. Nevertheless, the supply of gold increases by only between 1 and 1.5% every year.
To put it into perspective, the world’s population grows by more than 1% per year, and global real GDP rises an average of 3% annually.
For these reasons, we can say that both gold and Bitcoin have this characteristic in common: their supply is limited.
Differences between Gold and Bitcoin
Let us now discuss what are, in my opinion, the most important differences between gold and Bitcoin.
History
As we seen previously, gold has been used as money for at least 5,000 years. We know what kind of asset it is, and what we can expect from it. There is no mystery about it.
It is impossible to predict the future price of gold, but that is not really important. The price is just a random numerical value. The fundamental thing is the role gold plays within the economic and financial systems to make sure the value of our savings is protected.
On the other hand, Bitcoin is a very recent invention. It is difficult to know what its role will be in 50, 100 or 5,000 years.
As author Nassim Taleb says, the best predictor of the survivability of an invention is having survived for a long time before. Consequently, the longer Bitcoin survives, the stronger its use case becomes.
What we can say about Bitcoin is that its popularity has grown almost steadily. This has translated itself into higher prices in the long term.
Acceptance
Another important difference between Bitcoin and gold is the degree of acceptance by other people. Acceptance is a thing that can be defined in two different ways.
On the one hand, we could refer to the acceptance of an asset as a means of payment. That is, having the option to make purchases with that asset.
In this sense, Bitcoin has a low but growing degree of acceptance. An increasing number of online retailers now make it possible to pay with Bitcoin.
Gold is rarely used to make purchases. Remember that even in a gold standard, we do not use gold to make payments. We use an asset backed by gold.
The second type of acceptance has to do with wanting to own that asset. In this sense, the degree of acceptance for gold is very high. Most people would be happy to own some gold. And, throughout history, all civilizations have seen gold as a way to store wealth.
Compared to gold, Bitcoin still has a smaller audience. Not everyone would be willing to keep a portion of their wealth in Bitcoin, in part due to its high volatility. But that is slowly improving.
Upside potential
This is the most important distinction for those who want to achieve great returns. What asset has the biggest upside potential? Remember that we spoke about potential, not a certainty.
Bitcoin probably has way more upside potential than gold, as it is still an emerging asset. Its market capitalization is smaller. This makes significant price increases more likely. But beware of the risks.
Gold is already a safe haven asset. Can we expect good returns from gold? Absolutely. The current monetary system is in shambles. Fiat currencies have lost a lot of credibility. So, gold is likely to regain much of its importance and popularity.
But gold is already a big market. Probably not as big as many think, but big nevertheless. The market capitalization of gold is about 9-10 trillion US Dollars. To put that in perspective, the global equity market capitalization is just below 100 trillion. And the bond market is even bigger. The US government alone owes about $30 trillion.
Therefore, gold has the potential to appreciate significantly. In the 1970s, its price multiplied by 24 in a period of 9 years.
Regarding the potential for Bitcoin, it is difficult to say due to its volatility. What we can say is that it is by far the best performing asset in the world since 2009. Its price rise has been astronomical.
And if we assume that Bitcoin may be able to reach 50% or even 100% of gold’s market capitalization, the price will increase many times more. Of course, there is no guarantee this is going to happen.
Which is better: Gold or Bitcoin?
That depends on many variables: your goals, your risk appetite, your ability to withstand losses, and your time horizon. Gold and Bitcoin serve different purposes in a portfolio. The wisest option is probably to own both and hold them for the long run.
Both have incredible potential. Why not own them? Sure, you can go only for the safer one, or only for the one with the most potential. But they can make an incredible combination.
Consequently, it is attractive to own both. The question of how much you should own in each depends on your risk appetite. You are the only person able to answer that question. Hopefully this comparison between gold and Bitcoin will help you.
Conclusion
To summarize the most important points about this comparison between gold and Bitcoin, I would like to repeat the message that both assets have a lot of things in common but a very different investment profile.
Gold has been a safe haven asset for a long time. Due to its diversifying characteristics, it is a must in our portfolio.
For its part, the appeal of Bitcoin is precisely that it is not a safe haven asset yet. That makes it very interesting to own. The risks of investing in Bitcoin are significant, but the potential for gains are also extraordinary.
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