Is Bitcoin the New Gold: Similarities and Contrasts for Investors Seeking Stability?

Is Bitcoin the New Gold: Similarities and Contrasts for Investors Seeking Stability?

October 7, 2016/ Emma Roth

Investors are always on the lookout for ways to preserve their wealth, increase ROI, and grow their wealth. However, wealth preservation now seems to top the list as the U.S. Presidential elections draw near and the realities of the Brexit vote starts to sink in. Hence, investors tend to seek refuge and stability for their investments in safe-haven assets and alternative investments. Interestingly, gold and Bitcoin are two alternative investments that tend to attract the most attention.

Gold is a naturally occurring element that has been behind civilization, government, war, and trade for thousands of years. Bitcoin is a modern digital cryptocurrency that provides a virtual peer-to-peer platform to facilitate electronic trade. This article seeks to compare and contrast gold and Bitcoin in order to help investors make educated decisions for wealth preservation.

Similarities between gold and Bitcoin

1. Both are gold and Bitcoin are mined

Both gold and Bitcoin are mined by “miners” even though they use different skills and equipment. The changes in the supply of gold of gold are often determined by the discovery of new gold deposits and the development of more efficient mining techniques for extracting gold from ores. Likewise, powerful algorithms determine the volume of Bitcoin in circulation. The said algorithms determine how Bitcoin miners are rewarded when they add new Bitcoin transactions to the blockchain.

2. Finite supply but infinite demand and application

Another similarity between gold and Bitcoin is that they both have a finite supply but a practically infinite demand, use, and application. Gold is mined from the ground and the amount of gold available in the world is finite between 120,000 to 140,000 tons (above ground) at an estimated worth of $1.8 trillion). Likewise, Bitcoin is finite because the total number of Bitcoin that can be mined is 21 million Bitcoin.

However, the demand, usage, and applications of gold and Bitcoin is practically endless. Gold and Bitcoin offer a safe haven in times of financial instability. Gold has some industrial applications and Bitcoin meets the security and transparency needs of a digital economy. More so, some countries have started considering minting physical Bitcoin in order to endorse it as currency.

3. Neither gold nor Bitcoin is tied to a government currency

Another interesting similarity between gold and Bitcoin is that they are both free from direct government influence because neither asset is tied to a government currency. Hence, the government can’t make a move to set their exchange rate, devalue them, or determine how much of either gold or Bitcoin are in circulation.

The fact that neither gold nor Bitcoin is tied to a government currency makes them a good hedge against economic and geopolitical instability. Gold and Bitcoin will always be a legal tender irrespective of country, religion, nationality, or language barriers. Hence, if any world government runs into a mess leading to economic instability, both gold and Bitcoin are unlikely to lose their value; rather, they’ll tend to record an increase in their value during periods of economic instability.

4. Both gold and Bitcoin have a mutual enemy in central banks

Central Banks do not like the fact that gold could render their fiat currencies useless and they always try to undermine the yellow metal at every possible opportunity. The chatter about U.S. Federal Reserve’s plan to raise interest rates in order to reduce the safe-haven appeal of gold is a point in case. Interestingly, these central banks have started transferring their distaste for gold to angst for Bitcoin.

The emergence of Bitcoin as a world currency could potentially erode the necessity of central banks in the global economic landscape. For one, Bitcoin is an electronic money; hence, there’s little need for a national money supply. More so, the low transaction cost associated with Bitcoin transactions will eliminate the need for the interest rates that central banks set in line with economic trends.

Differences between gold and Bitcoin

Despite the interesting similarities between Gold and Bitcoin, it is important to point out some stark contrasts. To start with, gold is physical whereas Bitcoin is purely electronic; hence, Bitcoin is more suitable to the digital economy than gold. The physical nature of gold attracts the attendant risks of theft, being misplaced, and being destroyed (highly unlikely but plausible nonetheless). Bitcoin is digitalized and it would require a serious intent to steal Bitcoin – it could happen but you are not likely to be the only victim.

Secondly, Bitcoin could potentially be a better investment than gold because of the fundamentals of demand and supply and the effect of market forces. The price of gold is subject to many factors such as demand and supply, U.S. interest rates, USD Exchange rates, government policies, and geopolitical tensions. Hence, you can never really know what to expect and gold is an unstable way to seek stability in periods of economic and political uncertainty. Bitcoin has once surpassed gold when it traded for $1,242 and the factors are still much in place to make Bitcoin a more valuable alternative currency than gold.

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