The financial media has at times struggled to cover the emerging sector of cryptocurrencies. By now many have at least heard of the first and most prominent cryptocurrency, Bitcoin. If you ask a crypto enthusiast why Bitcoin is different from the thousands of other altcoins and digital tokens out there, you’ll often hear Bitcoin referred to by the nickname “digital gold” or even “gold 2.0”.
The assertion that Bitcoin is truly a digital form of gold is worth further examination. Is it fair to compare the two favorably after analyzing the similarities and differences, and scrutinizing the relevant pros and cons, of Bitcoin vs. gold?
1. Gold Has More Durable Sources Of Value
One thing that gold has undeniably been associated with throughout history is value. Gold’s centuries of use as money, in international commerce as backing for money, plainly attests to this. Bitcoin also makes a clear claim to a similar type of universal value. Aside from being a proof-of-concept for decentralized, fully digital currency, Bitcoin has the word “coin” right there in the name.
How does Bitcoin’s value measure up? We have to look at more than just price. Pointing out that BTC is trading at $4,000 USD while the gold spot price is at $1,300 USD per ounce is not an apples-to-apples evaluation. Sometimes you’ll see enthusiastic Bitcoiners cite the current prices, but equating one troy ounce of gold to one Bitcoin is rather arbitrary.
You can more reasonably compare the market capitalization (in dollar terms) of the Bitcoin supply against the total value of all the world’s gold. By this metric, the roughly $8 trillion of gold in the world dwarfs Bitcoin’s market cap of approximately $100 billion.
If we break it down further, it might be appropriate to liken the smallest unit of a Bitcoin, a Satoshi (1/100,00,000th of a BTC meaning it takes a hundred million Satoshi to equal one BTC), to an incredibly small weight of gold, such as a milligram. A single mg is the same as 1/1,000,000 (i.e. a millionth) of a kilogram. Expressed in these terms, the value of 100 Satoshi is roughly the same as 10 milligrams of pure gold. Each is worth about 40 cents.
Ultimately, the value of Bitcoin is based entirely on potential and perception. To be fair, the latter is also largely true of all fiat currencies. By contrast, gold has intrinsic value. Gold is classified as a “noble” or precious metal. Its unique properties as an element make gold useful in a surprising array of industries, from the tech and medical fields to aeronautics.
Moreover, because of its beautiful luster and unsurpassed malleability, gold continues to have underlying value as a popular medium for jewelry and religious artwork. The point is that gold isn’t only valuable due to its monetary characteristics or investment potential. Gold has a variety of important real-world uses that make it worth the cost of digging it out of the ground.
2. Bitcoin And Gold Have Many Types Of Demand
Bitcoin has three primary areas of demand, or use cases: digital currency, speculative asset, the blockchain network itself. First and foremost, Bitcoin is most readily identified as a peer-to-peer, decentralized digital currency. This is undoubtedly what most of its early adopters, and the general public, see as the main purpose of cryptocurrencies.
More recently, we have also seen an explosion of interest in Bitcoin as a speculative asset. As such, BTC prices - and the health of the broader crypto space as a whole - have experienced bouts of incredibly high volatility. A mere 0.3% of Bitcoin transactions are in the form of payments. It’s estimated that currently, as much as 80% of BTC trading volume is purely for speculation.
There is also growing demand for blockchain technology that underpins the Bitcoin network. This is essentially a distributed digital ledger that records all transactions that occur on the network.
Neither blockchain nor cryptography more generally is exclusive to Bitcoin. Virtually all other digital currencies make use of these tools. Although the notion of building innovative features on top of a blockchain, such as autonomously executing smart contracts, is more closely associated with another major cryptocurrency network called Ethereum, it’s true that any type of file can potentially be stored on the blockchain.
There are, however, lingering problems with the Bitcoin model of mining. “Mining” in this context is the method of generating new Bitcoins while also verifying transactions on the blockchain. The process relies on a Proof of Work concept that rewards miners for contributing their computer power to the network.
Bitcoin’s model is unavoidably deflationary. Put differently, each BTC should theoretically increase in purchasing power over time because the supply of new Bitcoins will always be shrinking until it reaches its predetermined maximum of 21 million.
Although this sounds reasonable on its face, it also has the consequence of making mining unprofitable at some point in the future. Eventually, the reward of Bitcoin given to miners could be worth less than the cost of electricity to mine them in the first place.
This issue can supposedly be solved by adjusting the “difficulty” of the mining algorithms, but it remains to be seen how Bitcoin will be used and how Bitcoin trading will operate as we approach the 21 million next decade.
Another problem is that Bitcoin has “forked” before. A fork usually means a faction of users disagree with some aspect of the network model, so they decide to break off and start a separate blockchain. This increases the chance that the demand for Bitcoin could water down over time.
On the other hand, gold has abundant sources of demand. Its popularity for ornamentation, jewelry, and art is robust as ever. Every day, it seems, new industrial uses for the yellow metal are discovered. Investment demand for gold coins and gold bars is also consistent.
3. Bitcoin Is Easier To Substitute
Another important consideration is how easily these assets can be substituted. If so, this dampens the long-term outlook.
Bitcoin has several prominent competitors in the crypto space. Ethereum (ETH) is noteworthy for the flexibility of its blockchain network, which can accommodate all sorts of apps and smart contracts. Ripple (XRP) is another major cryptocurrency, and its network can handle transactions much faster than Bitcoin.
All told, there are over 2,100 other altcoins in existence. This figure doesn’t even include the many cryptos that have failed or died thus far, as well. Bitcoin still accounts for roughly half of the total market capitalization of the entire crypto sector. The market caps of Ethereum and Ripple are only about 10% and 7% of the sector, respectively, by comparison.
There is a much lower risk of gold being replaced or substituted for as the king of precious metals. This is apparent in the financial sector. Gold has been used as a store of wealth for centuries, and central banks around the world still hold tons of the metal. Frankly, it’s telling that we don’t see financial institutions holding any other commodities besides gold as reserves.
Aside from its history as physical money and the world’s monetary standard, gold is also crucial for many technologies. Gold has applications as a catalyst in chemical reactions and its special properties prevent it from corroding under harsh conditions. This latter quality makes gold ideal for use in the aerospace industry and in medical settings, where the risk of failure can cost lives and billions of dollars.
In fact, an array of technologies rely on gold to work. Gold’s chemical and physical properties give it advantages over copper and silver for certain uses, such as in microprocessors, even though silver is actually better at conducting both heat and electricity. Gold is nevertheless impossible to substitute in many of its technological and industrial applications.
4. Bitcoin Has Much Higher Volatility
Volatility is a particularly important consideration here because “digital gold” would obviously have to have stability and staying power. In the simplest terms, volatility is a measure of how big and how frequent the swings are when an asset’s price is moving or changing. By any measure, Bitcoin volatility has been incredibly high over the years. Large vacillations in price are essentially the norm.
This pattern held true even after the Bitcoin market reached full exuberance. BTC rose an astounding 1,800 over the course of 2017, yet it subsequently crashed the following year. Prices plunged nearly 80% from their peak. This is not to imply that gold has zero volatility.
Gold prices more than doubled (+100%) during the two years immediately following the global financial crisis in 2009 before giving back more than a third of those gains in the following economic cycle. In the long run, gold has maintained its purchasing power against other currencies. Gold’s millennia-long track record in this regard speaks for itself.
The ups and downs for gold pale in comparison to the wild volatility that Bitcoin has exhibited over the last decade. Simply put, Bitcoin volatility is orders of magnitude higher than gold. This complicates Bitcoin’s case a stable store of wealth and a trusted medium of exchange.
5. Bitcoin Is Easier To Liquidate
The advent of electronic trading in financial markets has made liquidating a position in gold far easier than in the past. Only paper instruments such as gold ETFs or gold futures contracts enjoy this benefit, however. There are indeed times when electronic gold trading closes. Obviously, this is also true of brick-and-mortar locations that sell physical gold and coinbase, which cannot be liquidated with a few keystrokes.
Gold does enjoy the benefits of a nearly universal market where you can surely sell your gold no matter what country you find yourself in. Moreover, even during normal business hours, you will have to wait for your gold to be assayed-i.e., smelted and analyzed for purity and authenticity - if you are selling a generic bullion product.
Cryptocurrencies, by contrast, can take full advantage of electronic liquidation as digital assets. Bitcoin and its copycats were designed specifically with digital transactions in mind. These cryptos inhabit the electronic world by their very nature. Thus, selling your crypto for some other currency can be done from the convenience of a home computer or smartphone.
6. The Gold Market Has Superior Liquidity
It will be helpful to start with a definition of liquidity: essentially, how easily an asset can be bought or sold without impacting its market price. This isn’t a trivial consideration during the coronavirus. Bad liquidity means you might have to accept selling something for far less than it ought to be worth.
At intervals, Bitcoin has experienced rather poor liquidity. This is partly influenced by the lag in transaction speed during downtimes for the market; prices can jump or fall dramatically in the intervening hours. It’s also true that large-size trades tend to greatly impact the BTC price because trading volumes have been relatively thin under normal conditions.
There have even been revelations that the vast majority of the reported volume is inflated by non-competitive trading patterns to give the appearance of greater liquidity. Another problem is the wide discrepancy between prices on different Bitcoin exchanges on its homepage for the first time. In a liquid market, there should be virtually no divergence between the price of the same asset trading on different platforms or venues.
The gold market stands in contrast due to its extremely high liquidity. Maybe the only more liquid market in the world is for United States Treasury bonds. Daily trading volumes for gold are consistently high. Of course, you can also buy and sell physical gold all over the world. Perhaps most importantly for gold vs. Bitcoin considerations, gold has an abundant above-ground supply, and much of this precious metal eventually gets melted down and recycled rather than destroyed.
7. Gold Offers Greater Usefulness As A Hedge
Many proponents of cryptocurrency assert that Bitcoin is an effective hedge fund against disruptions in the broader markets. There is indeed a logical argument behind this assertion. Not only is Bitcoin widely seen as an “alternative” asset, but its creation was steeped in innovation and disruption from the beginning.
Bitcoin's prices have nonetheless exhibited a strong correlation with stock prices and institutional investors over the last two years. This pattern of following the equity market significantly reduces the usefulness of Bitcoin as a hedge. In short, it defeats the purpose.
Hedging against market downturns, high inflation, and uncertainty are what gold does best. Gold is the ideal hedge during times of economic turmoil. One of the biggest advantages that work in gold’s favor in this regard is that it is a non-correlated asset. This means that gold prices don’t tend to move in the same direction as other assets.
The only strong correlation gold exhibits are with currencies. The price of gold can rise or fall depending on the purchasing power of the currency it’s measured in the last year. This dynamic is especially true with the U.S. dollar on Wall Street, the world’s reserve currency, and the stock market. Because this relationship with fiat currencies is essentially an inverse (or negative) correlation, gold has tended to resist the effects of inflation (in terms of purchasing power) throughout history.
8. Gold And Bitcoin Both Provide A Degree Of Financial Safety
Safety over scams is over overlooked when the makeup of an investment portfolio is under discussion. It’s unfortunate because many risks abound in investing in startups. Everyone should plan accordingly for how much appetite for the risk they can tolerate. There are ways to mitigate some of these risks. The safest way to own gold is in a physical form, and the safest storage method is in an authorized depository - an insured vault.
Vault storage is actually a requirement for precious metals included in Gold IRAs. In general, allocated storage is preferable to pooled storage, where metals are treated generically or interchangeably so everyone’s assets are mixed together. With allocated (or segregated) storage, the exact items you deposit are kept separated from other depositors’ assets.
It stands to reason that investing in gold is similar to saving money, except without the inflation or depreciation risk of fiat currencies. There is a similar argument to be made about Bitcoin’s inflationary advantages, though its track record is far shorter and this assertion grows less certain when one pulls the time horizon out farther than 15 to 20 years from now.
The equivalent to vault storage for Bitcoin is storing your BTC in a cold wallet. This means using offline storage, such as a USB drive or external hard drive, and keeping the key (or password) to your digital wallet well-protected. If you lose or forget the private key, nobody can access your Bitcoins.
So long as you protect the key to your digital wallet, the security of your Bitcoin account is very high. Safely storing gold comes with the drawback of paying annual (or quarterly) storage fees. Unlike physical gold, however, any outage of electricity or the internet will effectively render your Bitcoin wallet inaccessible.
Conclusion: Bitcoin Is Not Digital Gold Yet
Although I’ve taken a reasonably scientific approach to this question, and utilized expertise in both the precious metal and cryptocurrency spaces, there are of course other comparisons you could make for Bitcoin vs. gold as a safe haven. I specifically focused, however, on qualities that would support or detract from Bitcoin’s case for the moniker digital gold and which is the better buy-in 2021.
Meanwhile, gold works better for the categories and makes a strong case as an alternative asset uniquely suited to the financial sector. Over the longer-term (the next 10-15 years), it will be fascinating to see which path each of these broader asset classes (precious metals and cryptocurrencies) follows.