It’s very likely Bitcoin has turned up in a couple of conversations you’ve had in the past few years.
Cryptocurrencies have been a huge excitement for everyone as people look for alternatives to the unstable currencies of everyday use. As the leading and most famous cryptocurrency, Bitcoin has received a lot of attention: at its highest, one Bitcoin was $20,000 in late in 2017. Now, in April of 2020, the cryptocurrency has dwindled to $7,000 per Bitcoin.
But is Bitcoin a safe haven or a currency? Could it be an alternative to gold? What are some of its most important properties? We put together this article to help people learn more about the main differences between Bitcoin and gold.
We’re not going to explain what Bitcoin is in this article. We’ll just mention that Bitcoin is a decentralised currency based on a distributed ledger – meaning every transaction is verified before going through (we recommend reading this guide by Blockgeeks to learn about the intricacies of Bitcoin).
Bitcoin was first created by Satoshi Nakamoto in 2009 to provide an alternative to normal (fiat) currencies. This took place shortly after the financial crisis when trust in banks and currencies crumbled and people wanted alternatives. With Bitcoin, users could hold and transfer money without relying on a bank or any other financial institution.
Since then, Bitcoin has evolved from digital currency to “digital gold”. This is because with the limit of 21 million bitcoin tokens, there is a finite amount (like gold!). Currently, people mostly buy bitcoin to invest in its value, hoping the price will increase (like it did in 2017). In some ways, Bitcoin is similar to gold: individuals can “mine” for Bitcoin like they mine for gold, and the limited amount means that Bitcoin’s value is supposed to increase. But is investing in Bitcoin the same as investing in gold? Let’s take a look.
We write a lot about gold as an investment here on the Minted blog. Gold works as an investment in several ways:
To diversify: putting your money in an asset that acts differently to the stock market means your portfolio isn’t so affected by a stock market crash or recession. In addition, during a recession people tend to buy gold which increases the price of gold.
To beat inflation: during certain time periods, gold does not beat inflation. However, in the long term, gold does beat inflation. And in some very short terms, gold does beat inflation. In fact, gold has increased by 36.6% since 2010. That’s a lot better than what you may get with a Cash ISA or a savings account.
To keep some money outside the monetary system: we aren’t ones to believe the sky will fall and that the financial system will collapse, however, we do believe it’s smart to have some money kept outside the system for when the unexpected happens. Gold has held inherent value since the Egyptians times (that’s over 5,000 years ago!). We can be confident that no matter what happens, gold will remain a store of value and can be used as a type of currency.
The main issue with Bitcoin is that it hasn’t been around for very long. That means that Bitcoin is less reliable when it comes to storing value or money. Gold has been used as a store of value for several thousands of years, whereas Bitcoin has been around for 10 years. A very long history means that the public is more likely to trust gold than Bitcoin.
Gold is “boring” and reliable. It’s an investment that will keep your money safe and not move. Bitcoin, on the other hand, is exciting. Bitcoin prices have been increasing at tremendous rates with huge fluctuations. Those who bought Bitcoin for a few pence in 2009 could suddenly afford a car in 2017 – that’s why Bitcoin is exciting.
However, if the government decides to crack down on Bitcoin or if there is a new technology that disrupts the space (like other cryptocurrencies), Bitcoin could quickly disappear. Gold, on the other hand, is not subject to the whims of any government. You’ll be able to use your gold anywhere in the world and it will still store value. Gold is low-risk: it is an element that will still hold value in 50 years. With Bitcoin, we’re not so sure.
Both Bitcoin and gold could be deemed secure ways of storing money. Gold is hard to forge, it’s very difficult to steal from a vault and difficult to destroy. Bitcoin is also difficult to destroy due to its encrypted nature and decentralised system.
Having said that, Bitcoin is still young and so it is still not so secure in some places. We just need to take a look at the huge security breaches that have happened in the past, such as the disaster with Mt. Gox or with Binance, where millions of dollars worth of Bitcoin were stolen and many people lost their money. Since cryptocurrencies are still a very new asset class, the safety infrastructure hasn’t been put in place yet. In fact, neither have the legal structures: people are still not sure who is liable when hacks like this take place.
Storing your bitcoin offline with a key on a private device makes it very hard to steal (although make sure not to forget your password!). However, storing Bitcoin online can be risky, since most online storage is not insured and legal ramifications can be complex. Storing gold in a vault is incredibly secure since all high-security vaults have third party insurance. Having said that, storing gold at home can be risky if not held in a very secure place.
A good reason why gold will always hold inherent value is because gold itself is useful. It is used in jewellery and many instruments, construction and drilling tools. We use it in our day to day lives, making gold a very useful and relevant element. The best proof of this is the fact that every year banks keep increasing their gold reserves.
Bitcoin was first established as a utility: a currency. However, many other cryptocurrencies have now appeared and are taking over that role such as Ethereum, Ripple and stablecoins. That’s not to say that cryptocurrencies aren’t useful: they offer access to money to those that cannot access banks or credit. Cryptocurrencies allow people to send money to anyone around the world who may not have access to traditional banks. However, Bitcoin itself may take a backseat on that utility, since it is limited to transferring 4.6 transactions per second and has been described as a clunky and unscalable system.
Both Bitcoin and gold are alternative assets that may be worth considering. However, the main issue with Bitcoin is that it has a very short history; all its implications aren’t thoroughly understood yet, which may make it a more riskier investment. If you are looking for some excitement, Bitcoin may be something to try. If you are looking to keep your money somewhere safe, hedge against inflation, and diversify your investments, we think gold is your best bet.
Ready to buy gold?