Bitcoin vs Gold: how does Bitcoin square up to the world’s oldest store of value?
Gold is a rare earth element that has been used by humans everywhere for coinage, jewelry, and other arts for 7,000+ years.
The World Gold Council claims that:
- 50% of all gold is used to make or decorate jewelry.
- 40% is used as investments.
- 10% is used for industrial purposes.
Gold is universally considered to be one of the most reliable stores of value available.
Thus, it is thus highly coveted.
In comparison, Bitcoin is a very recent invention.
Created in 2009 by Satoshi Nakamoto, it was originally intended to rival traditional fiat currencies like the USD and Euro. In fact, Satoshi described it as “a purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution“.
However, its extreme price volatility has led it to be seen as more of a speculative asset than a trusted means of exchange.
In recent years, Bitcoin has been dubbed “digital gold” for its capacity to safely store value and protect investors from monetary devaluation.
Naturally, many investors are asking themselves the following questions:
- How do Bitcoin and gold compare?
- Which is the riskier investment?
- Can Bitcoin be considered a reliable store of value, comparable to the world’s oldest asset?
To answer these questions, we must compare the following aspects of both assets:
- Price volatility
- Historical returns
- Convenience of storage, transportation and exchange.
1. BITCOIN VS GOLD: SUPPLY
It is estimated that above-ground gold supply is roughly 190,000 tonnes.
At writing, gold is valued at $1.5K per ounce (July 2021 updaye: Price is nos $1.8K/ounce) which equals to a total market valuation of more than 10 trillion dollars. Total gold reserves are unknown but we can safely assume that they are limited.
The bottoms line is that gold is considered scarce, useful and luxurious, which makes it valuable and highly coveted.
In contrast, Bitcoin’s total supply is known to be limited to exactly 21 million coins.
New Bitcoins are released into circulation through a process called mining and the Bitcoin protocol is programmed to halve the block rewards every 210,000 blocks, approximately once every four years.
Hence, Bitcoin block rewards continually decrease and will eventually reach zero. When this happens, no more Bitcoins will ever be released into circulation.
It is expected that the block rewards will reach 0 in the year 2140. As of November 2019, more than 18 million BTC are in circulation, leaving less than 3 million new BTC available to miners. Once the 21 million BTC are in circulation, the only incentive for node operators to operations will be the transaction fees given as a reward for record keeping.
As you can see, both Bitcoin and gold have limited supply.
However, the mining process is very different:
- Gold is mined in the traditional sense of the word and discovering new reserves is very expensive and time consuming.
- Bitcoin mining is entirely digital and total supply is already known to all, nullifying supply uncertainty. However, it is very expensive due to enormous energy consumption required to run mines.
One thing is certain: scarcity is a reality and the perceived usefulness of these assets creates demand and value.
2. BITCOIN VS GOLD: VOLATILITY & RETURNS
Both Bitcoin and Gold are popular markets for professional traders.
However, Bitcoin’s volatility is undoubtedly more attractive for extreme risk takers. Indeed, in the past year alone, BTC price roller-coasted from $5500 in Nov 2018 to $3000 on Dec. 10th before climbing back up to $3500 on March 20th, 2019 and then doubling in the space of three months to $10K on June 29th and reaching a high of almost $14K in June 2019 – with intraday swings of up to 20%. Heaven for traders. (July 2021 update: In 2021,volatility continues to rock the cryptocurrency markets as Bitcoin rose to $63K before plunging back down to $28K in the space of just a few weeks).
In comparison, consider that in 2017 gold prices never varied more than 2% per day.
From November 2018 to November 2019, gold prices went up a respectable 25% but this volatility cannot be compared to the absolute madness of the crypto markets.
Further, if perform a long-term analysis, Gold’s 100-year price chart reveals very low but steady returns: In February 1915, 1 oz of gold was valued at roughly $495; in November 2019, 1 oz is valued at $1500. This represents a 203% increase over the course of 100 years.
Unless you were shrewd enough to purchase a hefty amount of gold bars during the 1981-2000 period, when prices fell from $2200-$400, chances are your profits are modest. This is why Gold is considered a store of value rather than an investment: its primary purpose is to protect your purchasing power.
Bitcoin, on the other hand, is considered both a speculative asset and an emerging store of value.
However, some people wonder how BTC can be both as these two characteristics are seemingly contradictory: although BTC’s price appreciation may provide a safe haven from monetary devaluation, the day to day fluctuations in price encourage risk-averse investors to cash out their gains.
In any case, BTC’s 9-year price chart reveals colossal profits for long-term holders who bought just before the 2017 bull run.
Nevertheless, BTC is clearly becoming mainstream.
Institutional investors are starting to pour serious money into crypto markets as are “average Joes” looking to diversify from stocks and bonds. Also, quite surprisingly, studies estimate that up to 90% of Millennials prefer investing in crypto than gold. As the boomer generation slowly fades away, Millennials and Generation Z will shape the investment landscape of tomorrow – and Bitcoin is sure to play an important role.
3. STORAGE, TRANSPORT & EXCHANGE
The last thing to consider is how easily and safely one can store, transport and exchange these two assets.
Gold, being a physical asset, must be stored in a safety deposit box or a highly secured specialized facility (like a bank or Fort Knox).
No matter how secure the storage method, there is always a risk of theft.
Furthermore, transporting gold is cumbersome as it must be physically moved from one place to another. This is potentially costly as it can require armored vehicles and private security escorts. Again, the risk of theft is very high.
However, one major issue must be addressed: can gold be confiscated?
The answer is YES – and there is a significant historical precedent.
In 1933, Franklin D. Roosevelt signed Executive Order 6102 “forbidding the hoarding” of gold in the USA “under penalty of $10,000 and/or up to five to ten years of imprisonment“. The rationale behind this decision was that confiscating privately owned gold would help build up America’s gold reserves, combat inflation and strengthen the U.S. dollar.
Although the limitation on gold ownership was overturned by President Gerald Ford in 1974, nobody can guarantee that this will never happen again. Just remember that U.S. government debt stands at more than 22 trillion dollars, the FED is continuously injecting billions into the markets to boost liquidity and powers to the East are thinking of ways to rival and replace the U.S. dollar with one of their own currencies.
In contrast, Bitcoin, is a digital asset that can be stored either online or offline.
Indeed, Bitcoin can be stored on an online wallet or offline in cold storage. The holder of the wallet possesses keys that give him exclusive access to his wallet.
Theft of Bitcoin can occur through sophisticated hacking of online exchanges or theft of private keys. Fortunately, diligent holders can store their private key in a physical safe or memorize them, minimizing risks. Another solution is provided by the Winklevoss twins who allegedly “distributed snippets of a printout of their private keys across multiple safe deposits around the United States. This ensured that even if thieves got their hands on a fragment of the private key, the others would still be outside their reach“.
The fact that Bitcoin is digital makes it incredibly easy to transport.
You can transport all of your Bitcoin in a simple flashdrive.
Like gold, selling your Bitcoin is also very easy.
You can sell it through online exchanges or even face to face with someone who will give you cash for your coins. The beauty of BTC is that transactions are peer-to-peer.
But can Bitcoins be confiscated?
The short answer is YES – but it’s harder to confiscate than gold. Since BTC is stored on a wallet which has a private key, it is impossible to access without the code. Thus, confiscating Bitcoin first requires the secret code.
However, with the advent of sophisticated technology, it is plausible that criminals could find a way to link BTC wallets to IP addresses with the intent of extorting or scamming their owners.
Another risk could be repressive authorities tracking cash deposits on bank accounts originating from crypto exchanges.
Meticulous investigating could link an individual to a BTC address and block any transfer of funds from the account to the exchange. Confiscating the BTC per say would prove difficult but measures could be implemented to restrict access to exchanges – as the Bank of Montreal has done in Canada.
In any case, confiscation is not yet a reality but represents one of the many challenges that BTC may face in the future. Just take a moment to think of how China’s sophisticated facial recognition technology and Social Credit System are able to track and control virtually every aspect of citizens’ lives. This is just the first step in a comprehensive social control experiment that knows no boundaries.
BITCOIN vs GOLD: WHO WINS?
Both Bitcoin and gold share obvious similarities:
- They are desirable assets that are viewed as stores of value.
- Both possess the intrinsic ability to be effective means of payment but neither are widely used as means of exchange.
However, the differences between them are worth repeating.
One is physical, recognized as valuable for millennia, available even in the worst case scenarios (absence of internet and electricity being one), but has the disadvantage of being cumbersome and easy to steal.
The other is purely digital, could one day be replaced by better technology, is easy to transport and difficult to steal but entirely useless without electricity and internet.
Ultimately, these assets are neither rivals nor mutually exclusive investments.
They both present their own advantages and disadvantages and should be part of a diversified investment portfolio.
Here’s a chart providing quick summary of the characteristics of both assets.
|Supply||Volatility||Returns||Medium of Exchange||Storage||Sources of Demand||Transport||Confiscatable||Theft|
|BITCOIN (BTC)||Limited to 21 million coins||Very high||Long-term: Very high. Trading: Very risky||Yes but not widespread||Digital wallets (online and offline)||Speculation, Buy and Hold, Store of value||Very easy. Web-based wallets and flashdrive cold storage.||NO. Very difficult.||YES. Low risk but possible hacking, phishing, private key theft.|
|GOLD||Unknown||Medium||Long-term: Low but stable Short-term: Low risk||Yes but not used as currency||Physical (vaults, safes, banks)||Well defined: jewelry, coinage, arts||Difficult: Heavy, regulated, dangerous.||YES. Government regulations.||YES. High risk.|
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DISCLAIMER: This is not financial advice. Please conduct your own research before investing in any asset.