Bitcoin vs. Gold: Pros and Cons

Bitcoin vs. Gold Pros and Cons

Bitcoin was formed in 2009 in reaction to the inflated supply of fiat money that was created to save the banking system during the 2008 financial crisis.

The anonymous creator or creators with the pseudonym name of “Satoshi Nakamoto” envisioned bitcoin to be a decentralized currency incapable of being inflated.

Bitcoin is often compared to gold as a store of value or haven to avoid inflation and stock market volatility.

Gold bugs will argue that the volatility of bitcoin makes it a poor choice while bitcoin hodlers will point out the weak returns from owning gold. In this piece, we will compare the key differences and similarities between bitcoin and gold.

Bitcoin vs Gold the Pros and Cons

Storing and selling

Bitcoin is completely digital, thus allowing you to store large amounts without taking up any physical space. Gold, however, needs to be kept in a secure location and large amounts will take up a lot of space.  

You can invest in gold ETFs to solve this issue, but you would sacrifice the guarantee of owning actual gold. 

Selling physical gold requires more work than selling or exchanging bitcoin. If someone across the globe wants to buy gold from you, you’ll need to arrange and pay for shipping. Bitcoin is quickly transferred through online exchanges. Bitcoin exchanges charge fees for different transactions as does a coin dealer or refinery for selling gold.

Scarcity

There is a limited supply of both bitcoin and gold. While the amount of gold available 190,040 tons is just an estimate, it’s proven there will never be more than 21 million bitcoins in existence. As time goes by, less gold and bitcoin are available to mine.

U.S. geological survey estimates that there’s around 57,000 tons of gold left to be mined. NASA is also finding asteroids filled with gold and other precious metals. Asteroid mining does show a potential threat to decrease the rarity of gold but it will be a very long time until that’s a possibility.

While gold is rare, Bitcoin is much rarer and heavily rewards early adopters.

Practical uses

Gold is commonly used for jewelry, dentistry, electronics, and bullion. It’s tremendous durability and lustrous qualities have made it the king of precious metals.

Bitcoin is also known as the king of cryptocurrency due to its infrastructure and large user base. While gold has clearly defined uses and demand, bitcoin is quite different. The most common use of bitcoin is speculation, which isn’t necessarily a bad thing. Gold is also used speculatively, but not on the same scale.

Bitcoin has utility as a currency as it’s often used to purchase goods and services. The anonymity of bitcoin has made it a popular currency in the black market. While it’s easy to find someone who will buy your gold, it is rarely used as a currency during these modern times.

Sources of Gold Demand (2013-2017)

Sources of Gold Demand

Source: World Gold Council

Store of value

Gold has been known as a store of value for thousands and thousands of years. The value of gold remained high even during government attempts to outlaw it. Lately, gold purchases from countries and central banks have been on the rise since the recession. Throughout the duration of organized civilization, gold has always been viewed as a valuable asset.   

Cynics of bitcoin claim the cryptocurrency has no value and is only worth what the next person is willing to pay for it. Others also believe that the fact that it’s completely virtual makes it difficult or near impossible to determine its store of value. The true value of bitcoin has not yet been proven. It has high demand from both speculators and people who believe it will become a new global currency.

Return on investment

Bitcoin blows gold out of the water when it comes to return on investment (ROI).  

The value of one bitcoin went as high as $19,783.21 in 2017. The price dipped down to sub $4k in 2018 and is now rising again. The return potential of the cryptocurrency is much higher than gold.

For example, you can buy $5,000 worth of gold and possibly make $2,500 or lose $2,000. You can buy $5,000 worth of bitcoin and possibly make $100,000+ or lose the entire $5,000. Bitcoin is high risk, high reward while gold is low risk and low reward. 

Volatility

With the high risk, high reward that comes with bitcoin one should expect large price swings. This factor makes it less stable and more of a speculative asset than a reliable store of value or currency.

Fans of the cryptocurrency hope for a more stable future to help increase the rate of adoption as a fiat alternative.

While gold is also volatile it doesn’t nearly experience the same wild swings like its digital cousin.

Security

Cryptography and blockchain technology is used to secure the bitcoin system. Transactions are encrypted and personal information is hidden. Currently, it’s nearly impossible to hack bitcoin.

Blockchain ensures that each bitcoin is unique and tracks how every one of them is acquired. Each transaction is encrypted and sent to a “block.” Once the transaction has joined the block, it is impossible to change or modify it. However, some argue that advances in quantum computers could lead to vulnerabilities or possible hacks.

To keep your gold secure, you’ll need to find a safe location for it. This can be inconvenient and expensive. And keeping your gold stash in a safe deposit box isn’t ideal. You’ll have to pay the bank to store it and trust them to keep it safe.

Conclusion

Since both can’t be inflated or printed, and neither are correlated with the stock market, they will often be compared to one another. Even with all the similarities, gold and bitcoin are very different.

Though bitcoin is touted as the new digital gold, it still needs to pass the test of time. It’s doubtful that bitcoin will ever replace gold as a safe haven. However, it’s innovative blockchain technology is very exciting. There is also the potential for bitcoin to become a worldwide currency.

But for now, many obstacles are facing the cryptocurrency and its uses are not well defined. If you’re looking to buy some bitcoin or another cryptocurrency, Coinbase is a well-known and trusted exchange. Here is a referral link to sign up and get $10. Buying physical gold can easily be done online (affiliate link) or at a local coin shop.

The popular debate of bitcoin vs. gold is likely to continue. In order to benefit from either one, you’ll need to have a clear understanding of them.

I wrote this article myself and the views expressed are of my own opinion. This article should not be considered financial advice or interpreted as an endorsement of cryptocurrency.