When it comes to comparing a new asset class with a traditional one, investors have a tendency to ask, “Is it really comparable?” Since many people ask how bitcoin compares to gold, I’ll review several aspects of these two assets, which I believe will help answer that question.
In Gold We Trust
First, let’s start with the yellow metal. Humans have valued gold for thousands of years. From ancient Egypt, where it served in tombs and temple rituals to the current jewelry industry, gold has always had value. (Full disclosure: Author holds investments in gold and bitcoin.)
Gold has also played numerous roles in the U.S. economy because of its rarity. The gold standard was one of them. For decades, until President Nixon put an end to it in 1971, the value of a dollar was fixed to a specific amount of gold.
Indeed, according to the philosopher Aristotle, money has to respect three main criteria:
1. A medium of exchange.
2. A unit of account.
3. A store of value.
Today we no longer use gold as money. Instead it is used primarily for jewelry and as a safe haven in the form of bullion and gold coins, though it can also be used in other areas, such as electronics, dentistry and even aerospace.
The price of gold is also an indicator of our country’s health. Usually, during a period of expansion, gold prices remain steady or lower. On the other hand, during recessions, the price of gold rises. For example, in mid-September 2008, at the height of the financial market crash, the price of gold dipped below $740 per ounce, according to kitco.com. But in August 2011, gold rose to over $1,900 per ounce.
One interesting note is that whatever generation you are part of (baby boomer, Generation X, millennial or Generation Z), you have at least heard about gold.
Therefore, since it has been able to stand the test of time, gold remains an asset that is not ready to disappear yet.
What About Bitcoin?
Bitcoin was created in 2008 with the goal of having a currency that is independent from any government or bank. This idea came from observing the effects of too much centralization. The idea of creating a new decentralized currency seemed idealistic at first, but history has showed us that it can be done.
Bitcoin was worth very little in the beginning, but then interest in the currency grew when it reached parity with the dollar on February 9, 2011. Between 2011 and the end of 2015, bitcoin went from $4.60 to $426, a growth of over 9,000%, based on my analysis of prices using Cointelegraph data. Then, from April 27, 2015, to April 27 of this year, it rose more than 3,300% (from $224 to $7,787). This kind of growth has never happened in the history of finance, which is why this is something to pay close attention to.
However, one of the big flaws with bitcoin (and other cryptocurrencies) is its volatility. With double-digit variation per day being common, bitcoin falls into the high-risk asset category.
Despite this, its profitability thus far is undeniable. Today, with over 10 years of existence and all the other crypto assets in circulation, experts generally believe that bitcoin is here to stay.
The Verdict: Gold Versus Bitcoin
For bitcoin to be considered “digital gold,” it should have the same attributes as gold, with the obvious exception of tangibility. It checks off the first major attribute: rarity. Both have limited supply.
Regarding the currency aspect, let’s compare the three criteria mentioned earlier:
1. Medium of exchange: Both gold and bitcoin are mediums of exchange, because we can trade them for goods and services.
2. Unit of account: We can divide gold into half ounces or quarter ounces, and we can divide bitcoin down to 1 satoshi, which equals 1/100,000,000 bitcoin.
3. Store of value: This one is arguable. Usually store of value refers to an asset you rush to during economic turmoil because it has intrinsic value. Bitcoin has played this role in the past, but during the current crisis, its behavior has been more similar to the stock market. Many bitcoin skeptics also argue that it has zero intrinsic value since it’s intangible.
However, does intrinsic value only mean tangibility? What about the security behind bitcoin? What about the whole network of blockchain that makes bitcoin highly secure? What about this new way of creating trust in society?
With a new era coming, especially with the current economic downturn, I think we might have the answer in the next couple months or years. I believe that we will see the power of bitcoin as a store of value, and that next year it could significantly outperform the stock market.
For now, gold stays gold as a hedge against financial uncertainty, and bitcoin stays bitcoin as a speculative investment. However, let’s not forget that cryptocurrency is a relatively new way to exchange value globally, safely and privately, with a sense of freedom many are seeking to revive.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.