Gold vs bitcoin as an investment asset is a current popular debate. Bitcoin is viewed as a new alternative of safe heaven asset, that is challenging gold.
The most obvious difference is that gold is a tangible physical precious metal, whereas bitcoin is digital.
Bitcoin is often compared to gold as a safe haven asset. Indeed like gold, its price spike in moment of uncertainty. Certain academics like David Lee Kuo Chen state that “both assets are increasingly favored as alternative investments and critics of contemporary monetary policy.”
Bitcoin is the first world digital currency being decentralised (not controlled by one or a limited number of entities). The total supply of bitcoins that can be ever created is capped at 21 millions.
A bitcoin is represented by a record of transactions between different recipients. Recipients consist of digital addresses, represented by a random sequences of letters and numbers. Users purchase bitcoin by using a secret private key, equivalent to a card pin code.
Bitcoin is subject to high price volatility. From 2012 to 2013, the value of one bitcoin rose from 200$ to 1242$, nearly surpassing the price of gold who was at this period trading around 1250$ per ounces.
Gold and bitcoin are both forms of money. Then it’s a liquidity preference during time of crisis that drives investment decision.
It’s worth putting aside some of bitcoin’s short-term volatility and liquidity concerns to compare gold and bitcoin as long term store of value, side-by-side.
Because bitcoin is new, it has arguably more utility in the digital era compared to gold. In fact, most believe that it could unseat gold over the long haul. Spencer Bogart, analyst at Blockchain Capital says:
“if we think about the qualities that make gold a respected ‘money’ or store of value, bitcoin is actually superior in many regards.”
One advantage that bitcoin has over gold is that its supply level is fixed and transparent. This fact eliminates the fear of an inflationary scenario, during which overproduction could reduce the value of a fiat currency. In fact, bitcoin has a disinflationary supply schedule within its software source code.
Those characteristics have led bitcoin to become an alternative mean to reduce exposure to stocks volatility.
According to Jim Rickards, editor of Strategic Intelligence and author of Currency Wars: the making of the next global crisis, bitcoin is clearly a bubble which looks like the second biggest bubble in the history after the tulip mania.
In fact, it is really hard to determine the real value of a bitcoin, since there is no P&L. To illustrate, Rickards gives the following example:
imagine the following: you and I are bitcoin miners, right? So I sell you at 10,000. You sell back to me to 10,100. I sell back to you at 10,200. We just traded back and forth all day. There’s no P&L. We’re trading the same bitcoin back and forth. That’s called painting the tape. These exchanges get reported on the bitcoin exchanges. So an outsider who’s completely naive about this, says, “oh look the price is going up.”
Gold has the indisputable track record to have been a cherished store of value for thousand years, across human civilisations.
However, gold holds various characteristics that make it an ultimate safe haven. Firstly, it’s a valuable asset because of its scarcity, used in a lot of consumer goods such as jewelry and electronics.
In addition, gold supply is also relatively low and gold can not be manufactured like a company issues new shares or a federal bank prints money. It has to be extracted from the ground.
Gold has almost no correlation to other assets like currencies or stock indices. Gold has always performed well in bearish markets or when there is a stock market correction.