Bitcoin vs Gold: Who Wins?

Friends or Foes?

Gold is a rare earth element that has been used for coinage, jewelry, and other arts for 7,000 years. The World Gold Council believes that 50% of gold is used to make or decorate jewelry, 40% as investments and 10% for industrial purposes. Gold is considered to be one of the most reliable stores of value available and is thus highly coveted.

Gold demand by sector

In comparison, Bitcoin is a very recent invention. Created in 2009 by Satoshi Nakamoto, it was originally intended to rival traditional fiat currencies like the USD and Euro. However, its extreme price volatility has led it to be seen as more of a speculative asset than a trusted means of exchange. In recent years, Bitcoin has been dubbed “digital gold” for its capacity to safely store value and protect investors from economic and financial crashes.

How do Bitcoin and gold compare? Which is the riskier investment? Can Bitcoin be considered a reliable store of value comparable to the world’s oldest asset?

To answer these questions, we must compare supply, price volatility, historical returns and convenience of storage, transportation and exchange of these two assets.

1. SUPPLY

It is estimated that roughly 187,000 tonnes of gold exist above ground. As of writing, gold is valued at 1.5K per ounce which equals to a total market valuation of more than 10 trillion dollars. Total gold reserves are unknown but we can safely assume that they are limited. Gold is seen as scarce and luxurious, which makes it valuable and highly coveted.

This 18kt rose gold Patek Philippe retails for almost $700K

In contrast, Bitcoin’s total supply is known to be limited to exactly 21 million coins. New Bitcoins are released into circulation through a process called mining and the bitcoin protocol is programmed to halve the block rewards every 210,000 blocks, approximately once every four years.

Visit https://www.bitcoinblockhalf.com/ to consult the countown to the next BTC block reward halving

Hence, Bitcoin block rewards continually decrease and will eventually reach zero: When this happens, no more Bitcoins will ever be released into circulation. It is expected that the block rewards will reach 0 in the year 2140. As of November 2019, more than 18 million BTC are in circulation, leaving less than 3 million new BTC available to miners. Once the 21 million BTC are in circulation, the only incentive for node operators to operations will be the transaction fees given as a reward for record keeping.

Nodes are crucial for validating transactions: The more nodes there are on a given network, the greater the decentralization.

As you can see, both Bitcoin and gold have limited supply. However, the mining process is very different as gold is mined in the traditional sense of the word and discovering new reserves is very expensive and time consuming; Bitcoin mining is entirely digital and total supply is already known to all, nullifying supply uncertainty. One thing is certain: scarcity is a reality and the perceived usefulness of these assets creates demand and value.

2. VOLATILITY & RETURNS

Ready to ride the rollercoaster?

Both Bitcoin and gold are popular markets for professional traders. However, Bitcoin’s volatility is undoubtedly more attractive for extreme risk takers. Indeed, in the past year alone, BTC price roller-coasted from $5500 in Nov 2018 to $3000 on Dec. 10th before climbing back up to $3500 on March 20th, 2019 and then doubling in the space of three months to $10K on June 29th and reaching a high of almost 14K in June 2019 – with intraday swings of up to 20%. Heaven for traders.

To compare, consider that in 2017 gold prices never varied more than 2% per day. From November 2018 to November 2019, although gold prices went up a respectable 25% from $1200 to $1500, this volatility cannot compare to the craziness of crypto markets.

Further, if you do a long-term analysis, gold’s 100-year price chart reveals very low returns: In February 1915, 1 oz of gold was valued at roughly $495; in November 2019, 1 oz is valued at $1500. This represents a 203% increase over the course of 100 years, or just over 2% a year. Unless you were shrewd enough to purchase a hefty amount of gold bars during the 1981-2000 period, when prices fell from $2200-$400, chances are your profits are modest.

Gold prices have only just tripled in the past 100 years.

Bitcoin, on the other hand, is considered both a speculative asset and an emerging store of value. However, some people wonder how BTC can be both as these two characteristics are seemingly contradictory: Although BTC acts as a refuge from macroeconomic instability, the day to day fluctuations in price encourage risk-averse investors to cash out their gains. In any case, BTC’s 9-year price chart reveals colossal profits for long-term holders who bought just before the 2017 bull run.

Bitcoin’s price has been multiplied by 15 million percent since August 2010 ($0.06 in Aug 2010, $9200 in Nov 2019)

Nevertheless, in the long run, BTC is slowly going mainstream and becoming an emerging store of value. Institutional investors are starting to pour serious money into crypto markets as are “average Joes” looking to diversify from stocks and bonds. Also, quite surprisingly, studies estimate that up to 90% of millennials prefer investing in crypto than gold. As the boomer generation slowly fades away, millennials and generation Z will shape the investment landscape of tomorrow – and Bitcoin will surely play an important role.

Will millenials ensure Bitcoin’s future as a widespread store of value and means of exchange?

3. STORAGE, TRANSPORT & EXCHANGE

The last thing to consider is how easily and safely one can store, transport and exchange these two assets.

Gold, being a physical asset, must be stored in a safety deposit box or a highly secured specialized facility (like a bank or Fort Knox). No matter how secure the storage method, there is always a risk of theft. The black market is still very active and gold thieves will continue to operate as long as gold has value. Transporting gold is quite difficult as it must be physically moved from one place to another. This can be quite costly as it can require armored vehicles and private security escorts. Again, the risk of theft is very high. The silver lining is that selling your gold is quite easy as it is a very well regulated market: Finding a trusted buyer is quite simple and transactions are very quick.

The United States Bullion Depository – commonly known as Fort Knox – is a heavily fortified vault used to store a large portion of the U.S. government’s gold reserves and other precious items.

However, one major issue must be addressed: Can gold be confiscated? The answer is YES – and there is a significant historical precedent. In 1933, Franklin D. Roosevelt signed Executive Order 6102forbidding the hoarding” of gold in the USA “under penalty of $10,000 and/or up to five to ten years of imprisonment“. The rational behind this decision was to build up America’s gold reserves to combat inflation and strengthen the U.S. dollar. Although the limitation on gold ownership was overturned by President Gerald Ford in 1974, nobody can guarantee that this will never happen again. Just remember that U.S. government debt stands at more than 22 trillion dollars, the FED is continuously injecting billions into the markets to boost liquidity and powers to the East are thinking of ways to rival and replace the U.S. dollar with one of their own currencies.

Newspaper article announcing FDR’s Executive Order

Bitcoin, being a digital asset, can be stored either online or offline. It can be stored on an online wallet or offline in cold storage. The holder of the wallet possesses keys that give him exclusive access to his wallet. Theft of Bitcoin can occur through sophisticated hacking of online exchanges or theft of private keys. Fortunately, diligent holders can store their private key in a physical safe or memorize them, minimizing risks. Another solution is provided by the Winklevoss twins who allegedlydistributed snippets of a printout of their private keys across multiple safe deposits around the United States. This ensured that even if thieves got their hands on a fragment of the private key, the others would still be outside their reach“.

Given their immense Bitcoin fortune, the Winklevoss twins resort to extreme measures to safeguard their private key.

The fact that Bitcoin is digital makes it incredibly easy to transport: anyone can travel the world with a simple flashdrive in their pocket without raising any suspicion or jealousy.

This Trezor wallet – that can fit in your jeans’ front pocket – stores all of your Bitcoins offline.

Like gold, selling your Bitcoin is also very easy: you can sell it through online exchanges or even face to face with someone who will give you cash for your coins. The beauty of BTC is that transactions are peer-to-peer.

But can Bitcoins be confiscated? The short answer is YES, but not as easily as gold. Since BTC is stored on a wallet which has a private key, it is impossible to access without the code. Thus, to confiscate it the first thing you need is access to the wallet.

However, with the advent of sophisticated technology, it is plausible that criminals could find a way to link BTC wallets to IP addresses with the intent of extorting or scamming their owners.

Another risk could be repressive authorities tracking cash deposits on bank accounts originating from crypto exchanges. Meticulous investigating could link an individual to a BTC address and block any transfer of funds from the account to the exchange. Confiscating the BTC per say would prove difficult but measures could be implemented to restrict access to exchanges – as the Bank of Montreal has done in Canada. In any case, confiscation is not yet a reality but represents one of the many challenges that BTC may face in the future. Just take a moment to think of how China’s sophisticated facial recognition technology and Social Credit System are able to track and control virtually every aspect of citizens’ lives. This is just the first step in a comprehensive social control experiment that knows no boundaries.

The Chinese Social Credit System poses a serious threat to personal liberty, which runs counter to Bitcoin’s core principles

4. CONCLUSION: BTC vs GOLD – WHO WINS?

Which of Bitoin or gold do you believe is the better asset?

Both Bitcoin and gold share the similarity of being desirable assets that are viewed as trustworthy stores of value. Neither are widely used as currencies per say but they do possess the intrinsic ability to be effective means of payment.

However, the differences between them are worth repeating: One is physical, recognized as valuable for millennia, available even in the worst case scenarios (absence of internet and electricity being one), but has the disadvantage of being cumbersome and easy to steal; the other is purely digital, could one day be replaced by better technology, is easy to transport and difficult to steal but entirely useless without electricity and internet.

Ultimately, these assets are not mutually exclusive investments nor rivals. They both present advantages and disadvantages and can certainly be part of a diversified investment portfolio.

Here’s a chart providing quick summary of the characteristics of both assets.

  Supply Volatility Returns Medium of Exchange Storage Sources of Demand Transport Confiscatable Theft
BITCOIN (BTC)   Limited to 21 million coins       Very high   Long-term: Very high. Trading: Very risky       Yes but not widespread   Digital wallets (online and offline)     Speculation, Buy and Hold, Store of value   Very easy. Web-based wallets and flashdrive cold storage.     NO. Very difficult. YES. Low risk but possible hacking, phishing, private key theft.
      GOLD       Unknown       Medium Long-term: Low but stable Short-term: Low risk     Yes but not used as currency     Physical (vaults, safes, banks)   Well defined: jewelry, coinage, arts   Difficult: Heavy, regulated, dangerous.     YES. Government regulations.     YES. High risk.

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DISCLAIMER: This is not financial advice. Please conduct your own research before investing in any asset.

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