Bitcoin vs. Gold

There has been increased discussion about the benefits of bitcoin vs. gold since bitcoin has arisen as a store of value in recent years. Bitcoin and gold are both investments that are here to stay in the long run, though each with advantages and disadvantages.

The Advantages of Bitcoin

Bitcoin is the original cryptocurrency. As a cryptocurrency and digital form of money, bitcoin is generated and traded using encryption techniques to prevent theft and promote anonymity, though with limits. Bitcoin transactions are posted on a public ledger known as a “blockchain.” As the first cryptocurrency, it is the most well-established and well-known of hundreds that have since been developed. Bitcoin has a “first mover” advantage and has become a recognizable brand.

Among the advantages of bitcoin over fiat currencies and gold are that it does not require physical space to store, is limited in quantity to a maximum of 21 million units, and is decentralized, allowing users to trade units of bitcoin independent of central bank policies and desires. It is a competitor to traditional forms of money. It can also be used to facilitate transactions online, as an established digital currency. Potentially, the transaction fees of bitcoin are much lower than traditional credit cards and payment processors.

Gold Buddha statue.

The Advantages of Gold

Gold is universally recognized as money due to its unique properties: it is rare, durable, divisible, and malleable. It is a precious metal with a bright yellow luster. It has been used for thousands of years to make jewelry and mint coins, and due to its scarcity countless wars have been fought to obtain it. Gold is also used in industry as a conductive metal, especially for electronics.

Unlike bitcoin and paper money, gold has intrinsic value. Gold is a physical form of money that you can hold in front of you, and though it requires space to store in significant quantities, this is not usually a problem given its high value as compared to silver, which requires significantly more space. Unlike bitcoin, gold cannot be stolen via hacking. Similar to bitcoin, gold can be used as a hedge to the risks inherent with fiat money, which can be printed infinitely. The supply of gold increases steadily at one to two percent annually, preventing spikes of inflation in the price of the precious metal.

Because gold has intrinsic value, it will always be recognized as money universally. No matter where in the world you are, gold can be liquidated for cash or other goods. Though bitcoin is likely to remain the “gold standard” of digital currency as the first major one, there is a risk of a superior, more technologically advanced digital currency taking its place and potentially rendering it obsolete or with significantly reduced value.

However, because gold is a metal of very high value, it is not as good of a medium of exchange in a modern, complex society. Though it is no longer practical to make gold for day to day transactions, gold nonetheless remains an excellent store of value for savers.

Why Bitcoin and Gold Are Good Investments

While gold has a long history as money and will remain a precious metal, the future is digital. Bitcoin represents the evolution of money from tangible (metal or paper) to intangible. Though bitcoin can be replaced with a superior technology, the likelihood of that as of this time appears very slim. Moreover, software developers will continue to make enhancements to bitcoin to maintain its position as the digital currency with the largest market capitalization. As both forms of money can be used to hedge against the uncertainties within fiat currency markets, investors should seriously consider accumulating both forms of money.

Bitcoin: The Original Cryptocurrency

Bitcoin, developed in 2008, is the world’s first cryptocurrency, and as such it has revolutionized how people see and use money. As a cryptocurrency, the coin is mined and traded using complex calculations by computers with specialized mining software connected to the internet. Bitcoin transactions are posted on a public ledger known as a “blockchain.” With transactions confirmed repeatedly by computers at different locations, bitcoin transactions gain trust and become permanent. The person who developed this novel software is known pseudonymously as “Satoshi Nakamoto.” He participated in early discussions about bitcoin online, but has since disappeared, causing speculation as to who this mysterious figure is.

Unlike traditional paper money — known as “fiat” money, as it’s regulated by governments and central banks — bitcoin is decentralized and unregulated. It can be traded anywhere in the world by a person with an internet connection and the means to purchase it. Unlike traditional bank accounts, bitcoin wallets don’t require a name or identity. Due to its anonymity — though with limits, as transactions are posted publicly — it has been used by black market vendors selling illegal goods and services. There are also concerns about the currency’s misuse for other forms of crime, such as money laundering. However, though there is potential misuse of bitcoin for these activities, it also has the potential to facilitate transactions generally and thus benefit humanity.

Bitcoin’s status as the first cryptocurrency has been very advantageous for it, making it a brandable coin with global recognition. Of the hundreds of cryptocurrencies that exist, bitcoin has the highest market share and greatest daily transaction volume (though this may change in the future). Bitcoin is accepted by over 100,000 merchants, and there are even ATMs issuing bitcoins in some cities.

With a theoretical limit of 21 million coins, bitcoin cannot be devalued like fiat currencies by a sudden massive production of new units or coins. This has made bitcoin an attractive alternative to those who worry about massive money printing by central banks. Some investors, including libertarians who are skeptical of central banks, view bitcoin as complementary to a gold investment.

Given the limit of bitcoins that can be made and the high valuation of the currency due to its popularity, it can be broken down into units making it easier to transact. For example, a milli-bitcoin, or mBTC, is .001 or one-thousandth of a bitcoin, and a micro-bitcoin, or μBTC, is .000001 or one-millionth of a bitcoin. A satoshi is .00000001 or one-one-hundred-millionth of a bitcoin.

The Future of Bitcoin

As the original cryptocurrency, bitcoin has a significant lead over competing cryptocurrencies in terms of adoption and familiarity, but the shifting technological landscape means bitcoin’s status as most popular cryptocurrency will constantly be under threat. Given that the currency is decentralized, there is disagreement between miners and users on making fundamental changes to the software to speed up transactions and reduce transaction fees due to network congestion as a result of its popularity, allowing competing cryptocurrencies to gain market share. Concerns about a potential “hard-fork,” which would split the currency into two versions to address scaling concerns, have kept the price of bitcoin somewhat subdued. Additionally, as bitcoin poses a threat to fiat currencies, there is the possibility of governments and central banks colluding to establish laws and regulations to make widespread adoption of the digital currency problematic.

However, some technologists believe the genie is out of the bottle, and that bitcoin and similar technologies can no longer be stopped due to their ability to facilitate trade. So whether or not governments and central banks become hostile to it is irrelevant, as more people use the technology out of convenience and necessity. Given the inevitability of digital currencies becoming mainstream, governments and central banks are likely to eventually embrace them, albeit initially with reluctance and skepticism.