Bitcoin has sometimes been described as a type of digital gold. Some claim that this is what the anonymous creator of Bitcoin Satoshi Nakamoto envisioned when the cryptocurrency was launched in 2009. Indeed, the two assets share some similarities but also have many differences. When seeking to understand the commonalities between Bitcoin and gold it helps to consider factors such as the scarcity of supply, practical applications, and intrinsic value.
Here’s a brief guide that will help you make some comparisons between Bitcoin and gold before you choose an asset for investing. Many investors find that Bitcoin is a great alternative to gold, and that it may offer more liquidity and other advantages.
Reasons to Buy Gold
Let’s begin our comparison of Bitcoin and gold by looking at reasons an investor would want to buy each asset. We’ll start with the reasons one would buy gold.
Gold is one of the rare assets in life that has a proven gold. Like other assets the value of gold can rise and fall, but it has consistently retained worth throughout a variety of market conditions. As an asset, gold is not going away. It is too ingrained in the financial foundation of many countries.
Investing in gold also offers one access to a large number of ETFs and other funds. Exchange traded funds, mutual funds, hedge funds, and even retirement plans like 401K accounts can be partially invested in gold. Funds allow an investor to pool their money with other investors to control larger amounts of an asset.
There is little correlation with other asset classes when it comes to gold. Of course, there are some downsides. Gold is a physical asset that requires physical access. It can be expensive to store and transport gold. Those who wish to own gold and not have it kept in a secure facility also run the risk of having the asset stolen. Finally, gold offers a somewhat smaller profit margin than some other asset classes.
Reasons to Buy Bitcoin
Now let’s examine some of the reasons that an investor might want to prefer Bitcoin over gold, as well as some of the disadvantages.
Bitcoin offers a profit potential that may be substantially higher than that of gold. The cryptocurrency market can be a volatile environment, but Bitcoin has achieved massive gains in just ten short years of existence. Many investors believe that there is little reason to doubt that the token will stop increasing in value. Some extreme Bitcoin enthusiasts have even speculated that the token will surpass $100,000 in value at some point. We might not go that far but we agree there is the potential for profit in cryptocurrency.
The digital nature of Bitcoin can also be a plus for investors. It requires no physical storage of any kind. It is easily accessed, too, and more options for access like cryptocurrency debit cards are becoming available each day. Like gold, Bitcoin has little correlation with other asset classes.
There are, of course, some negatives. Bitcoin’s real value is unproven when compared with gold. It is also true that the cryptocurrency markets are extremely volatile. In addition, there are a limited number of ETFs and funds available for investors. It is encouraging that more cryptocurrency exchanges are exploring funds and options as vehicles for investors.
Scarcity of Bitcoin and Gold
Bitcoin and gold both share a feature that directly affects their value and potential as investments. They are assets which are somewhat limited in supply. Most investors measure scarcity in something known as a stock-to-flow ratio.
A stock-to-flow ratio is basically a scarcity score. You divide the stock of an asset by its flow. Another way to express this is dividing the existing supply by the inflation rate. When these calculations are performed the stock-to-flow rations for each are:
- Gold – 54
- Bitcoin – 27
Both Bitcoin and gold are on the very low end of numbers representing scarcity. Both are very scarce when compared to other asset classes. It is also worth noting here that the closer the number comes to zero, the more volatile an asset is in terms of market conditions. So, we can see that Bitcoin is a more volatile asset than gold.
What an investor needs to understand about scarcity where Bitcoin and gold is concerned is that scarcity helps to insulate value.
The Practicality of Bitcoin and Gold
It might surprise you to know that two of the most vocal critics of both gold and Bitcoin are Warren Buffet and Charlie Munger, the leaders of Berkshire Hathaway. Buffet is regarded as the world’s greatest investor. He has been constantly critical of Bitcoin, saying that it has no real value and even going so far as to claim it doesn’t exist at all except in the minds of those who trade it. Munger has been even less diplomatic, suggesting trading Bitcoin is like trading fecal matter.
Investors in gold and Bitcoin would disagree. They would argue that each asset has a practicality about it that helps to preserve its value. One of the foremost practical applications of gold is for the making of jewelry. Can you ever imagine a world where gold jewelry would not be in demand?
The exciting thing about Bitcoin is that it is the father of blockchain technology. This technology is creating many exciting developments in the world of finance. As more financial institutions explore how blockchains can help them manage their own services, the potential value of all cryptocurrency increases. It seems that Buffet and Munger may just be too old and set in their ways to accept that digital currencies are changing the way people manage money and invest.
There is an intrinsic value that is attached to both gold and Bitcoin that make them attractive asset classes. The interest of investors in these assets is not likely to wane. Furthermore, Bitcoin may someday be regarded with the same respect as gold when it comes to investment classes.
How to Buy Gold and Bitcoin
If you are thinking about adding gold or Bitcoin to your portfolio, there are things you need to know about buying each of them. For Bitcoin, the process may actually be a little easier in some cases.
If you want to buy gold you have several options. You can go through a dealer and purchase bars and gold coins that actually have to be stored. You can either store them in a secure facility or store them at your home. Either way, this can be troublesome for some investors.
Another way to “own” gold is to purchase shares in ETFs or funds. There are even some enterprises which allow you to buy shares of the gold they own. Any type of gold can be a form of asset, from the gold in your wedding ring to the gold in your teeth. Of course, all types of gold are not going to have the same liquidity.
Buying Bitcoin requires that you have a cryptocurrency wallet. That is all you need to store your Bitcoin. You don’t need a physical vault or a bank. You can then buy Bitcoin from other individuals, or you can make purchases from a cryptocurrency exchange. You may also be able to find some cryptocurrency funds that include Bitcoin in their portfolio.
We hope that this brief guide to the similarities and differences of gold and Bitcoin has been useful to you. In many respects these are exciting asset classes which should be a part of any investor’s portfolio.