Gold and bitcoin are two assets that have a lot of die-hard “true believers,” people for whom the asset class seems like essential investments. They also each have severe detractors who argue that one or the other is not a good investment at all.
Does the rapid rise in the bitcoin price and the slide in the gold price over the past several months indicate that bitcoin is sapping demand from gold? The short answer is no, because the performance of gold makes sense without reference to bitcoin. A longer answer requires discussing the major differences between gold and bitcoin.
It seems like a perfect time for crypto traders to say “I told you so” and pour more money into the most popular cryptocurrency, celebrating its triumph. Bitcoin has started 2021 with a new all-time high above $34,000 (£24,850, €27,724) and analysts remain bullish about the cryptocurrency’s strong performance in the next 12 months and beyond.
Bitcoin has tripled in value during 2020, showing steady growth even when the stock market was severely hit by the Covid-19 pandemic. With the US dollar weakening, Bitcoin and other popular cryptocurrencies continue gaining more attention as traditional investors are looking to diversify their portfolio and to get better return on investments.
Bitcoin’s mainstream adoption is also supported by the growing interest of the institutional investors. Payment giant PayPal (PYPL) has already embraced Bitcoin. JPMorgan analysts share this view, saying that the adoption of Bitcoin by institutional investors has only just begun and they added that the price of gold would suffer because of this in the coming years.
In 2020, the price of gold has jumped over 30 percent from $1,517 per ounce on January 3, 2020 to over $2,000 per ounce on August 6, 2020. The spike in the price of gold isn’t yet at the level reached in the 2017 Bitcoin boom when the price of one Bitcoin rose from $999 on January 1, 2017 to $3,270 on August 6, 2017, an increase of over 300 percent. The demand for gold in 2020 is driven in part by investors seeking a perceived safe harbor from uncertainties in traditional asset classes caused by the COVID-19 pandemic and, in part, by speculation. But similar to the Bitcoin bubble, much of the recent demand for gold as an investment comes from retail investors.
But bitcoin has been called blockchain gold, which begs the question — how similar are they as an investment?
Both are considered safe-haven assets
Gold will always be a safe haven for investors. We can say the same thing about Bitcoin. As the oldest and most well-known cryptocurrency there is, Bitcoin has been somewhat of an ever-present and durable investment. Bitcoin has recently become something that investors flock to in a time of financial distress.
Both have a limited supply
There will only ever be 21 million bitcoins in circulation, that much we know for sure. This makes Bitcoin a limited digital asset, as after the 21 million are mined (predicted to be in 2140), there will never be more Bitcoin released, this makes it similar to gold in some ways.
Although gold may not run out as quickly as Bitcoin, studies have shown that gold production may be declining and may become economically unsustainable by the year 2050. This is due to the fact that humans have extracted all of the “easy gold” therefore, we have to dig deeper into the earth to retrieve the nuggets. This also means that gold is also a limited asset.
Both are speculative investments
A speculative investment is when the asset in question has a high degree of risk where profit depends a lot on the price fluctuations of the market. Bitcoin, with its famous volatility, can definitely be categorized as a speculative investment. Gold isn’t as well-known for being as volatile as Bitcoin, but it is still considered a speculative investment as investors buy with the hopes of holding it until significant gains can be made.
comparing the two
There are far more differences than similarities between these two assets. It is somewhat strange how they are lumped together when one looks closely at the details.
For hundreds of years, gold has dominated the safe-haven asset arena, while bitcoin was launched just over a decade ago and has only achieved widespread recognition in the last few years. Below, we'll compare these two investment options head-to-head:
Transparency, Safety, Legality
Gold’s established system for trading, weighing and tracking is pristine. It’s very hard to steal it, to pass off fake gold, or to otherwise corrupt the metal. Bitcoin is also difficult to corrupt, thanks to its encrypted, decentralized system and complicated algorithms, but the infrastructure to ensure its safety is not yet in place.
Rarity
Both gold and bitcoin are rare resources. The halving of Bitcoin's mining reward ensures that all 21 million Bitcoin will be out in circulation by the year 2140. While we know that there is only 21 million bitcoin that exist, It is unknown when all the world's gold will be mined from the earth. There is also speculation that gold can be mined from asteroids, and there are even some companies looking to do this in the future.
Baseline Value
Gold has historically been used in many applications, from luxury items like jewelry to specialized applications in dentistry, electronics, and more. In addition to ushering in a new focus on blockchain technology, bitcoin itself has tremendous baseline value as well. Billions of people around the world lack access to banking infrastructure and traditional means of finance like credit. With bitcoin, these individuals can send value across the globe for close to no fee. Bitcoin's true potential as a means of banking for those without access to traditional banks has perhaps yet to be fully developed.
Liquidity
Both gold and bitcoin have very liquid markets where fiat money can be exchanged for them.
Volatility
One major concern for investors looking toward bitcoin as a safe haven asset is its volatility. One need look only to the price history of bitcoin in the last two years for evidence. At its highest point, around the beginning of 2018, bitcoin reached a price of about $20,000 per coin. About a year later, the price of one bitcoin hovered around $4,000. It has since recovered a portion of those losses, but is nowhere near its one-time high price point.
Besides overall volatility, bitcoin has historically proven itself to be subject to market whims and news. Particularly as the cryptocurrency boom swept up a number of digital currencies into record-high prices around the end of 2017, news from the digital currency sphere could prompt investors to make quick decisions, sending the price of bitcoin upward or downward quickly. This volatility is not inherent to gold for reasons mentioned above, making it perhaps a safer asset.
In recent years, a number of alternative cryptocurrencies have launched which aim to provide more stability than bitcoin. Tether, for instance, is one of these so-called "stable coins." Tether is linked with the U.S. dollar in much the same way that gold was prior to the 1970s. Investors looking for less volatility than bitcoin may wish to actually look elsewhere in the digital currency space for safe havens.
Gold’s history spans back over ten thousand years and across the globe, while bitcoin has existed for a little more than a decade. The former is a physical object that can be worked into many shapes and sizes, whereas bitcoin only exists in the digital realm.
The key advantage of bitcoin over gold
Gold is much less practical for day-to-day use than bitcoin. The latter may have its flaws, but at least in theory, it allows for near-instant digital micro-transactions without a centralized bank in the middle.
One cannot typically buy a cup of coffee with physical gold. There are some workarounds such as debit cards that payout from a physical gold stash held by a third party, but these are edge cases. The core point of bitcoin is to allow for a new kind of transaction, nearly instant and frictionless, which is essentially opposite the nature of gold.
The worst case scenarios for gold and bitcoin investors
What is the worst case for investors in each asset class? Gold has an interesting possible worst-case scenario: Asteroid mining.
Some people believe that the current wave of space entrepreneurship from Elon Musk’s SpaceX and Jeff Bezos’s Blue Origin could lead to asteroid mining that will bring substantial additional amounts of gold into the earth’s marketplace. This could theoretically increase the supply of gold, no alchemy needed, and thus lower the price of gold, hurting investors.
It may sound like science fiction, but one may need to really consider the future impact of space exploration on gold assets. For anybody thinking about investing in large amounts of gold and passing it down to their grandchildren, this could be a real problem.
For bitcoin, the worst case is more immediate: The system could simply fail. This could happen through market pressure if the optimists are wrong and the economic system collapses as a bubble like the famous Tulip Mania of the 1600s. It could also result from some unforeseen technical glitch or attack vector being discovered and ruining the security of the system.
The simplest way that bitcoin could fail would be through a massive disruption of the internet. If a solar event knocked out all of the computers in the world, bitcoin’s transaction history would simply vanish.
Ethereum founder, Vitalik Buterin warned in tweets that cryptocurrencies are “still a new and hyper-volatile asset class, and could drop to near-zero at any time”. Gold will always have the advantage of having intrinsic and traditional value.
On a general note both are good investments depending on your risk appetite.
Does the rapid rise in the bitcoin price and the slide in the gold price over the past several months indicate that bitcoin is sapping demand from gold? The short answer is no, because the performance of gold makes sense without reference to bitcoin. A longer answer requires discussing the major differences between gold and bitcoin.
It seems like a perfect time for crypto traders to say “I told you so” and pour more money into the most popular cryptocurrency, celebrating its triumph. Bitcoin has started 2021 with a new all-time high above $34,000 (£24,850, €27,724) and analysts remain bullish about the cryptocurrency’s strong performance in the next 12 months and beyond.
Bitcoin has tripled in value during 2020, showing steady growth even when the stock market was severely hit by the Covid-19 pandemic. With the US dollar weakening, Bitcoin and other popular cryptocurrencies continue gaining more attention as traditional investors are looking to diversify their portfolio and to get better return on investments.
Bitcoin’s mainstream adoption is also supported by the growing interest of the institutional investors. Payment giant PayPal (PYPL) has already embraced Bitcoin. JPMorgan analysts share this view, saying that the adoption of Bitcoin by institutional investors has only just begun and they added that the price of gold would suffer because of this in the coming years.
In 2020, the price of gold has jumped over 30 percent from $1,517 per ounce on January 3, 2020 to over $2,000 per ounce on August 6, 2020. The spike in the price of gold isn’t yet at the level reached in the 2017 Bitcoin boom when the price of one Bitcoin rose from $999 on January 1, 2017 to $3,270 on August 6, 2017, an increase of over 300 percent. The demand for gold in 2020 is driven in part by investors seeking a perceived safe harbor from uncertainties in traditional asset classes caused by the COVID-19 pandemic and, in part, by speculation. But similar to the Bitcoin bubble, much of the recent demand for gold as an investment comes from retail investors.
But bitcoin has been called blockchain gold, which begs the question — how similar are they as an investment?
Both are considered safe-haven assets
Gold will always be a safe haven for investors. We can say the same thing about Bitcoin. As the oldest and most well-known cryptocurrency there is, Bitcoin has been somewhat of an ever-present and durable investment. Bitcoin has recently become something that investors flock to in a time of financial distress.
Both have a limited supply
There will only ever be 21 million bitcoins in circulation, that much we know for sure. This makes Bitcoin a limited digital asset, as after the 21 million are mined (predicted to be in 2140), there will never be more Bitcoin released, this makes it similar to gold in some ways.
Although gold may not run out as quickly as Bitcoin, studies have shown that gold production may be declining and may become economically unsustainable by the year 2050. This is due to the fact that humans have extracted all of the “easy gold” therefore, we have to dig deeper into the earth to retrieve the nuggets. This also means that gold is also a limited asset.
Both are speculative investments
A speculative investment is when the asset in question has a high degree of risk where profit depends a lot on the price fluctuations of the market. Bitcoin, with its famous volatility, can definitely be categorized as a speculative investment. Gold isn’t as well-known for being as volatile as Bitcoin, but it is still considered a speculative investment as investors buy with the hopes of holding it until significant gains can be made.
comparing the two
There are far more differences than similarities between these two assets. It is somewhat strange how they are lumped together when one looks closely at the details.
For hundreds of years, gold has dominated the safe-haven asset arena, while bitcoin was launched just over a decade ago and has only achieved widespread recognition in the last few years. Below, we'll compare these two investment options head-to-head:
Transparency, Safety, Legality
Gold’s established system for trading, weighing and tracking is pristine. It’s very hard to steal it, to pass off fake gold, or to otherwise corrupt the metal. Bitcoin is also difficult to corrupt, thanks to its encrypted, decentralized system and complicated algorithms, but the infrastructure to ensure its safety is not yet in place.
Rarity
Both gold and bitcoin are rare resources. The halving of Bitcoin's mining reward ensures that all 21 million Bitcoin will be out in circulation by the year 2140. While we know that there is only 21 million bitcoin that exist, It is unknown when all the world's gold will be mined from the earth. There is also speculation that gold can be mined from asteroids, and there are even some companies looking to do this in the future.
Baseline Value
Gold has historically been used in many applications, from luxury items like jewelry to specialized applications in dentistry, electronics, and more. In addition to ushering in a new focus on blockchain technology, bitcoin itself has tremendous baseline value as well. Billions of people around the world lack access to banking infrastructure and traditional means of finance like credit. With bitcoin, these individuals can send value across the globe for close to no fee. Bitcoin's true potential as a means of banking for those without access to traditional banks has perhaps yet to be fully developed.
Liquidity
Both gold and bitcoin have very liquid markets where fiat money can be exchanged for them.
Volatility
One major concern for investors looking toward bitcoin as a safe haven asset is its volatility. One need look only to the price history of bitcoin in the last two years for evidence. At its highest point, around the beginning of 2018, bitcoin reached a price of about $20,000 per coin. About a year later, the price of one bitcoin hovered around $4,000. It has since recovered a portion of those losses, but is nowhere near its one-time high price point.
Besides overall volatility, bitcoin has historically proven itself to be subject to market whims and news. Particularly as the cryptocurrency boom swept up a number of digital currencies into record-high prices around the end of 2017, news from the digital currency sphere could prompt investors to make quick decisions, sending the price of bitcoin upward or downward quickly. This volatility is not inherent to gold for reasons mentioned above, making it perhaps a safer asset.
In recent years, a number of alternative cryptocurrencies have launched which aim to provide more stability than bitcoin. Tether, for instance, is one of these so-called "stable coins." Tether is linked with the U.S. dollar in much the same way that gold was prior to the 1970s. Investors looking for less volatility than bitcoin may wish to actually look elsewhere in the digital currency space for safe havens.
Gold’s history spans back over ten thousand years and across the globe, while bitcoin has existed for a little more than a decade. The former is a physical object that can be worked into many shapes and sizes, whereas bitcoin only exists in the digital realm.
The key advantage of bitcoin over gold
Gold is much less practical for day-to-day use than bitcoin. The latter may have its flaws, but at least in theory, it allows for near-instant digital micro-transactions without a centralized bank in the middle.
One cannot typically buy a cup of coffee with physical gold. There are some workarounds such as debit cards that payout from a physical gold stash held by a third party, but these are edge cases. The core point of bitcoin is to allow for a new kind of transaction, nearly instant and frictionless, which is essentially opposite the nature of gold.
The worst case scenarios for gold and bitcoin investors
What is the worst case for investors in each asset class? Gold has an interesting possible worst-case scenario: Asteroid mining.
Some people believe that the current wave of space entrepreneurship from Elon Musk’s SpaceX and Jeff Bezos’s Blue Origin could lead to asteroid mining that will bring substantial additional amounts of gold into the earth’s marketplace. This could theoretically increase the supply of gold, no alchemy needed, and thus lower the price of gold, hurting investors.
It may sound like science fiction, but one may need to really consider the future impact of space exploration on gold assets. For anybody thinking about investing in large amounts of gold and passing it down to their grandchildren, this could be a real problem.
For bitcoin, the worst case is more immediate: The system could simply fail. This could happen through market pressure if the optimists are wrong and the economic system collapses as a bubble like the famous Tulip Mania of the 1600s. It could also result from some unforeseen technical glitch or attack vector being discovered and ruining the security of the system.
The simplest way that bitcoin could fail would be through a massive disruption of the internet. If a solar event knocked out all of the computers in the world, bitcoin’s transaction history would simply vanish.
Ethereum founder, Vitalik Buterin warned in tweets that cryptocurrencies are “still a new and hyper-volatile asset class, and could drop to near-zero at any time”. Gold will always have the advantage of having intrinsic and traditional value.
On a general note both are good investments depending on your risk appetite.
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Why Bitcoin and other Cryptocurrencies are going down.
