Just a few years after its creation, many are comparing Bitcoin to gold. They have called Bitcoin “digital gold” because it has a low correlation with all other assets, especially stocks, making it useful for storing value and hedge against inflation. But how related is Bitcoin to gold, and can Bitcoin ever replace gold?
What is gold?
Gold was discovered thousands of years ago and it is challenging to credit its discovery to any individual as it was used in different regions of the world in the early days. However, the metal is widely used as a store of value, a function it has performed for thousands of years due to its ability to maintain value over time and its immunity to adverse economic conditions. Gold has been a good asset to invest in during bear markets.
Gold has been widely used as currency in many parts of the world. Currently it is seen as an asset for investment, a store of value and is used for other purposes including making jewelery and ornaments, medals and awards and many other projects in the construction and manufacturing industries.
What is Bitcoin?
Bitcoin is a digital currency that operates independently of any intermediary, including banks and governments. It is built on blockchain technology and allows peer-to-peer transactions between users. It was created in 2009 as the first cryptocurrency by a developer known as Satoshi Nakamoto. It remains the most valuable cryptocurrency to date.
Bitcoin is widely used as a payment method, and just like gold, it is also a resource that attracts investors and speculators.
4 similarities between gold and bitcoin
Let’s look at some of the similarities between gold and Bitcoin:
1. Flexibility
Fungibility refers to the ability of an asset to be exchanged for another asset of the same type. For example, both Bitcoin and gold are fungible, as you can exchange them for another identical asset of the same equivalent.
2. Rarity
Gold and Bitcoin are rare and have a limited supply. The maximum number of Bitcoins that will ever exist is 21 million tokens, and it is projected to reach this number by the year 2140.
Gold is also in limited supply and it is expected that the production of gold will decrease and that the extraction of gold will become more difficult because miners have extracted most of the gold near the surface of the earth. Their scarcity has made them, to a large extent, immune to inflation.
3. Security options
Since they have a low correlation with the stock market, Bitcoin and gold offer a hedge against inflation. This quality makes them a possible choice for investors who want to secure their positions.
4. Speculative investments
Bitcoin and gold provide opportunities for speculative investments. That is, you can make money by predicting the price direction within many price fluctuations. Bitcoin is highly speculative, while gold is not as volatile. But investors also buy gold to make significant gains.
5 differences between gold and bitcoin
Below are some of the differences between gold and Bitcoin.
1. Regulation
Gold is largely a universal security. In many countries, you can get access to loans with gold as collateral. It is unusual to see the government frowning on gold, but rather on illegal gold mining and some unacceptable practices surrounding it.
On the other hand, Bitcoin cannot yet be considered a universal security. Moreover, Bitcoin has unclear regulatory status in many regions.
2. Tangibility
Gold has a physical form, while Bitcoin does not. With this we can say that Bitcoin is more portable than gold. You can move around with $100,000 worth of Bitcoin without a problem since it’s all on your smartphone as a virtual currency. Moving around with the same amount of gold can be challenging.
3. Price stability
Bitcoin is extremely volatile, with frequent price swings. It may be better suited for short- and medium-term trades than long-term positions. In 2022 alone, the price of Bitcoin fell by more than 65%. However, it had a price increase of more than 100% between January and November of the previous year.
However, gold is very stable, making it a good store of value. It has been a store of value throughout human history and is very useful for long-term trades. For example, gold only decreased by 4% in 2022. As another example, between January and March 2021, the price of gold increased by 13%. However, it fell by 12% between March and December of the same year.
4. Eigenvalue
Gold has been used in many applications and industries. It is used to make jewelry and many other valuables. For the foreseeable future, demand for gold and products made from it will continue to exist.
Bitcoin is primarily used as a form of currency. The digital instrument is used for speculation and value transfer. With its unpopular acceptance worldwide, there is also a limit to where you can use it. Bitcoin is a faith-based currency whose price rises when people have confidence in it and falls when confidence falls. It has no intrinsic value and there is no guarantee that the price will not fall to zero at some point.
5. History
Gold has a strong history of being trusted as a store of value for many generations. On the other hand, Bitcoin has only been around for 14 years (at the time of writing) and doesn’t have that long of a history. Additionally, Bitcoin is volatile and not as popular as gold.
Can Bitcoin Replace Gold?
The simple answer to this is “not yet”. Bitcoin is a faith-based currency that has yet to stand the test of time. It is used as currency only in some settings and by certain people, meaning it is not yet widely accepted. In addition, its volatile nature and limited use cases make it challenging to consider it as a resource that can store wealth for the future.
Gold remains the first choice for storing wealth when the economy or stock markets are down. Its historical reliability, real value and use cases make it worth adding to your portfolio. Bitcoin, on the other hand, has started to gain popularity. Still, many big-money investors may be wary of investing in a currency whose future is unclear.
Is Bitcoin Digital Gold?
Since Bitcoin also has a weak correlation with the stock market, it provides opportunities to hedge against inflation. More so, its volatile nature offers higher potential profits than gold since your asset can increase by many percentages within a few weeks. On the other hand, if the price falls when you invest, you may have to wait a long time for the price to recover before withdrawing your money without suffering a loss.
If Bitcoin can prove its value over time, it may be able to compete with gold as a safe haven investment during adverse economic situations.
Should You Invest in Bitcoin or Gold?
The choice of which one to invest in depends on you and your investment goals.
Bitcoin and gold both provide a good basis for short-term speculative trading. If you are a day or swing trader who wants to take daily profit from their short-term movements, then the option to choose depends on your interest, as they both provide many opportunities for short-term investments.
Gold is a good option for a long-term investment with low risk. However, Bitcoin may be a better option if you have a high appetite for risk and are also interested in high returns.
Always remember that no investment has a certain outcome, and every investment involves risk.
The information on this website does not constitute financial advice, investment advice or trading advice and should not be considered as such. MakeUseOf does not provide trading or investment advice and does not recommend that any particular cryptocurrency should be bought or sold. Always perform your own due diligence and consult a licensed financial advisor for investment advice.
