04 Dec GOLD AND BITCOIN – THE NEW NEMESIS?
For many years, the ultimate safe haven trade for investors has been gold. However, with the recent boom in Bitcoin and its value exceeding $10,000 a piece, it’s starting to turn heads – should you be looking at Bitcoin over Gold?
Gold Vs. Bitcoin – Their Behaviour
Gold usually performs well during corrections in the market because even if it doesn’t necessarily rise, an asset that remains static while others decline is quite useful as a hedge. Plus, as more people flee stocks and invest in gold, the price rises accordingly.
Bitcoin is a blockchain-based cryptocurrency that shares some properties with its gold counterpart. In fact, many have called Bitcoin “digital gold” in the past due to its weak relationship with all other assets, stocks especially.
Like gold, there is a limited amount of Bitcoin. It must be mined, but not with drilling machinery, instead, the digital currency is mined with the total computer power of its vast network of users, who process transactions on the blockchain for a small amount of Bitcoin. At an estimated cap of 21 million Bitcoins, demand has a magnified effect on the cryptocurrency’s price. For many, both gold and Bitcoin are a genuine decentralized global currency.
The Price of Gold & Bitcoin
The price of gold and Bitcoin are showing solid gains, The question is, which one is more reliable?
Of course, gold has a few thousand years track history to back this thesis because Bitcoin is relatively new. However, this is not to say that Bitcoin cannot be considered as a safe haven.
As mentioned, Bitcoin recently surpassed the $10,000 per piece mark, while gold stands at around $1,285 per ounce. That means many people investing less than $10,000 are buying less than one Bitcoin, as opposed to gold dealers who are selling physical amounts of gold as small little as 1 gram wafers – a mere fraction of the cost of 1 whole Bitcoin.
For hundreds of years, gold has dominated the safe-haven asset arena, and it is yet unknown if Bitcoin presents a real threat.
Key Differences Between Gold and Bitcoin
Transparency, Safety, Legality
Gold’s established system for trading, weighing and tracking is pristine through its vast infrastructure of gold traders. It’s very hard to steal it, pass off fake gold, or otherwise corrupt the metal. Bitcoin is also difficult to corrupt, thanks to its encrypted system and complicated algorithms, but the infrastructure to ensure its safety is not yet in place. The Mt. Gox disaster is a good example of why Bitcoin traders must be wary. In this disruptive event, a popular exchange went offline, and all of its user’s Bitcoins, totalling around $460 million, was stolen.
Gold can continue to be mined until a certain point in the far future, but eventually there will be no more Bitcoin. The algorithm that manages the blockchain rewards miners for verifying and processing transactions, but in as little as 10 years, the supply will run out. Some claim, that this higher level of scarcity means that Bitcoin could have a higher price ceiling than gold, and is the most important catalyst for the current speculative bubble.
While gold is physically useful for jewellery and industry, Bitcoin’s applications are not yet clear. So far, it is a digital instrument of speculation and value transferability, but it is difficult to buy things with and has limited utility as a currency. Being an exclusively faith-based currency is price-positive when there is popular support, but the opposite might also be true. There’s not much stopping Bitcoin from hitting $0 other than belief. As the world saw during the Dutch Tulip Mania, this could have adverse consequences.
Largely due to the properties above, Bitcoin is more volatile compared to gold. As price increases, people’s opinions on the revolutionary currency become stronger than ever. This newfound confidence will accordingly cause wild price swings.
It’s much easier to get cash for gold than cash for Bitcoin. In the limited number of exchanges that allow fiat withdrawal, all impose daily limits, and most banks are still afraid to accept and deal with it, meaning that Bitcoin is not as liquid as it could be. People worldwide purchase gold and are willing to pay for it while Bitcoin’s market is limited.
A Final Thought
Another interesting difference between gold and cryptocurrencies is that gold is not dependent on the operation of the internet, thus affording it a degree of protection from heavy-handed regimes. Precious metals companies and gold dealers have long been established traders of gold and the go-to place to buy precious metals.
We can see that gold has a fierce new competitor as the ultimate safe haven after dominating this arena for thousands of years, only the test of time will determine if it’s a real opponent or just another phase.
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