The Ongoing Debate: Gold vs Bitcoin

August 18, 2020

Article written by: Bontle Moroka

While bitcoin and gold as investments may seem worlds apart – with one being a tangible natural resource and the other being purely digital, created by computers crunching complex equations – they do have one thing in common, they are both scarce and globally accessible units of value. In fact, bitcoin was designed to mimic some of gold’s unique natural properties. Just as one mines for gold in the ground, individuals also mine for new bitcoin digitally. The supply of bitcoin was purposely limited to increase its value, just as gold is considered a rare resource. Both these assets are not affected by banks or local governments, making them attractive investments during global turmoil such as the COVID-19 pandemic. The similarities between bitcoin and gold attracts a similar profile of investors in many regards.

Gold and other precious metals have long served a role in many experienced investors’ portfolios, bitcoin and other cryptocurrencies are emerging as a powerful complement to (or even in rare circumstances a replacement for) gold in many diversified portfolios. The ratio of how to split your investments is still debated, so it’s best to compare them head-to-head.

Transparency, safety, legality

Gold is subject to an established system of trading, making it difficult to steal, corrupt or pass off fake gold. Due to its encrypted, decentralised system and complicated algorithms bitcoin is also difficult to corrupt, however, the legislation to ensure its safety is not yet in place. There are not many laws that protect digital assets and thus investors must still be careful if they put all their eggs in the digital asset basket.

Rarity

Both gold and bitcoin are rare resources. We know that there are only 21 million bitcoins in circulation, the halving of the bitcoin mining reward ensures that all 21 million will be out in circulation by the year 2140. When it comes to gold the script is slightly different; it is unknown when all the world’s gold will be mined from the earth. There is also speculation that gold can be mined from asteroids – with some companies looking to do this in the near future.

Volatility

One of the biggest concerns for investors looking at bitcoin as a safe haven asset is its volatility. The past two years have served as proof of bitcoins’ volatile nature. At its Height in 2018 bitcoin reached a price of $20000 per coin, but roughly a year later, the price of one single bitcoin was worth approximately $4000. Bitcoin has since recovered its losses, but it is still nowhere near as valuable at its one-time high price point. Bitcoin does have a history of reacting to market whims and news, particularly as the cryptocurrency boom swept up several digital currencies to extremely high prices in 2017. When news circulates the digital currency realm, investors tend to make quick decisions, sending the bitcoin value upward or downward at a rapid rate. This volatility does not apply to gold, perhaps making it a slightly safer bet.

The innovation and success of bitcoin is admired by many experienced investors. Gold and bitcoin are both worthwhile investments that have drawn significant attention as safe-haven assets. They are both speculative investments, in that their prices are not based on more basic fundamentals like revenue, earnings or interest payments or influenced greatly by external forces. The reality is that both Bitcoin and Gold can be used to ensure that you have a balanced risk on your investment portfolio. As I always say though, exercise caution and do your research before you go ahead and make your decision.

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