If you’ve spent any time in the crypto sphere you’ve certainly heard Bitcoin (BTC) referred to as digital gold. But not because Bitcoin is useful for plating watches. Rather because the crypto is potentially useful for storing value. Many traders these days put their money in Bitcoin trusting that the investment will not only retain value but may potentially even gain value over time.
But is investing money in Bitcoin a sound decision? More to the point, is Bitcoin an accurate investment that’s comparable to gold? We’ll take a closer look at this in our guide and clarify the reality of the situation.
Before we investigate the relationship between Bitcoin and gold let’s first get a better idea of what a cryptocurrency is. Bitcoin came to be in 2009, its launch following soon after the 2008 economic recession. The 2008 recession is the event that traders recognise as a turning point for the current crypto sphere. The recession was, after all, the event that spurred the mysterious Satoshi Nakamoto into action. According to lore, after witnessing the recession Nakamoto came to realise just how unreliable centralised banking systems are.
Thus, the original paper for Bitcoin came to be, with Nakamoto creating an alternative currency that would never collapse due to recession. Nakamoto understood that there can be no more global financial collapses, assuming that no central banks are participating.
If the story of Nakamoto is or isn’t true is unknown, mostly because it isn’t clear if Satoshi Nakamoto even exists. What is clear is that a person, or persons, wrote a paper about how a cryptocurrency could function without the need for a central bank. As is apparent Bitcoin caught on, took the world by storm, and is now seen as the global crypto standard.
Most important is that Bitcoin also became a good store of value, according to traders.
Bitcoin, and more importantly the Bitcoin blockchain, are direct equivalents of a giant, digital ledger. A blockchain is nothing more than an immense, constantly updating collection of information. The information includes who has what crypto, how much of that crypto they have, and if anyone on the blockchain is making any transactions. If transactions take place the ledger must update, hence why the blockchain needs miners. Most important, however, is that no central authority controls the ledger, or how the ledger functions.
But what are miners, and why are they necessary? The blockchain not only needs to exist on a hardware network. It must also get constantly maintained and managed. Miners are independent third parties that volunteer the use of computer hardware. When information on the blockchain needs processing, it is divided into random digital blocks and sent to miners. The miners then assist with the processing. For their services, miners are paid in crypto.
The original purpose of Bitcoin, as stated in the paper written by Satoshi Nakamoto, was to avoid banking systems entirely. Hence the original Bitcoin was to work on a peer-to-peer basis, with transactions going directly between traders. The peer-to-peer concept was not used, given concerns about safety and security. A blockchain system is utilised instead, though the basic idea of having a currency without a central authority is operational.
So, Bitcoin is a currency that exists without the need for a bank, but what purpose does it serve? Apart from being relatively safe and free of the global financial system, Bitcoin has evolved in how it is used. The original idea was that Bitcoin works as a day-to-day currency, but that isn’t how most traders use the crypto today. Instead, Bitcoin is now a means of investment and value storage. This brings us back to the original concept of Bitcoin being equivalent to gold.
Traders buy Bitcoin as an investment, trusting that the currency’s value will continue to increase. Some do use crypto as a means of transaction, but this has become increasingly rare.
But the underlying question here is why Bitcoin has value in the first place. If a digital currency that has no physical element is valuable, what gives it that value? In other words, what makes Bitcoin worth buying? This is the question that must be answered to determine if it is worth your time to invest in a digital asset.
There are a few main reasons that a cryptocurrency has value. Let’s look at them now and get a better understanding of the situation.
A big drawing card of Bitcoin is that it is run by a community, for a community. Crypto enjoys a vast, globe-spanning community of loyalists that is almost cult-like in its devotion. Millions have invested not just their time and money, but their lives into crypto. From miners to traders, to financial experts, millions of people insist that Bitcoin is the future.
To a lesser extent is the mining aspect of the crypto. There are currently over a million miners that support the Bitcoin blockchain, each paid in crypto. This million-strong group owes their livelihoods to Bitcoin, at least in part. It only stands to reason that these miners are going to stay loyal to Bitcoin until then end.
Essentially, Bitcoin is the currency of the people, and communities tend to stay loyal once they’ve committed.
Hype is a powerful tool. Some would even say that hype is the most powerful tool when it comes to public awareness of cryptocurrencies. The more that hear about Bitcoin, and the more that want to be a part of the community, the higher the value of the crypto will climb. It’s as simple as that.
Many think that Bitcoin is a world-changing technology, and this may be true. But more important is that a growing number of the public believe that Bitcoin has the potential to change the world. This public perception makes Bitcoin valuable, thereby also making it a hot commodity.
To put it another way; the days of Bitcoin being seen as a fringe asset are over. Many public figures, including financial experts, are openly investing in crypto. It only stands to reason that the public will follow.
There is not an infinite amount of gold in the world. At some point, there will be no more gold, given that the last ounce will get mined. The supply of gold is also controlled, ensuring that the market is never flooded. A market flooded with gold would devalue the commodity to the point of no value at all. All of this is true for Bitcoin as well.
The total amount of Bitcoin is finite, meaning that only a set supply is available to the public. As such, the market cannot become flooded or devalued. However, you may recall that miners get paid for their work in Bitcoin. This means that a constant supply of crypto is flowing into the market; a situation that will eventually result in a devalued currency. This conundrum is why a system of halving is in use.
Halving means that the amount of Bitcoin a miner can earn is strictly controlled. The amount of Bitcoin a miner earns is halved after 4 years, or after the mining of 210,000 blocks. The amount is halved again after another 4 years, or after another mining of 210,000 blocks. This strict control of the market ensures that Bitcoin maintains its value in the long term.
Gold is a metal that is mined. It is brought to the surface via various mining operations around the world. In terms of purpose, gold serves only a single mainstream function; being a luxury commodity. There are some practical uses for gold, such as in the manufacture of semiconductors. But for the most part, jewellery is the primary reason that anyone will ever want gold.
What makes gold stand apart from other precious metals is that it has also been adopted for financial trade. Our ancestors declared, in 1500BC, that gold is a good metal for trading purposes. Why? Because it was, and still is, easier to carry around gold coins rather than a dozen bags of rice. The gold coins will never stop equalling the value of the bags of rice, making gold a convenient way to do business. Gold is, after all, always going to be worth the same as the bags of rice.
The trend of using gold in the financial system lasted until 1974. At that time the first gold futures were traded in New York, making gold a verified modern financial commodity.
Gold is an enormously valuable asset, though perhaps not for the reasons you think. While it is true that gold is a precious metal, the value of the metal itself is only part of the reason that the metal is so sought after.
The primary factor that makes gold so desirable is its infallible long-term value. Gold can’t lose its value, given that it is widely used and widely traded. To look at it another way, there is virtually no chance of gold ever going ‘bankrupt.’ Given that there is no central authority that controls all gold, the metal will always have value no matter what happens to any individual organisation.
Gold also holds its value very well. If an ounce of gold is bought today there is a good chance that the ounce will be worth the same amount in a week, month, or year. The chances are that the value will have increased, rather than decreased. Though there is no guarantee of this.
Liquidity is also very important in the world of financial trading, and gold is extremely liquid. Liquidity refers to how easy it is to trade or sell a commodity at short notice, and there is almost no better commodity for this than gold. Offer to sell gold and buyers will line up.
All these factors make gold a very useful, incredibly versatile commodity.
Traditional financial traders and investors utilise gold in many ways. The primary way in which gold is useful is as a hedge against inflation, as a hedge against poor market performance, or as portfolio diversification.
Since gold generally maintains its value in the long run, investing in gold means that even if a local currency is failing, gold will still hold its value. The trick is that a trader can buy gold with a currency, and then be sure that the same value is applicable whenever that gold is sold. The value of gold is retained no matter what happens to the local currency, given that gold and currencies are not linked. Gold is, in a nutshell, a commodity separate from all currency value.
The same is true when it comes to market performance. Even if the local or global market is doing poorly, gold tends to maintain value. Any funds in gold should emerge from the poor market having retained value, even if the broader market has suffered. Of course, hedge investments of this kind aren’t bulletproof. Gold’s overall price may fluctuate. However, it’s generally accepted that gold will remain more resilient than other investment options. When the market recovers the price of gold will recover too. And, in most cases, the price will become buoyed up and rise above the initial purchase price.
Financial experts are always talking about portfolio diversification, but what does it mean? Diversifying a portfolio refers to spreading investments around. If you were to sink all your money into silver, for example, only for the price of silver to collapse you’d be bankrupt. However, if half your money was in silver, and half in gold, you’d be fine even if silver did collapse. Gold is extremely resilient, meaning that no matter what happens to your other investments your gold investment should always be safe.
To put it in a nutshell, most investors consider their gold investment a bit of a safe haven.
Gold is also useful as a long-term investment. Since gold’s price tends to, at the very least float, there is little risk of an investment losing value. Instead, it is more likely that gold will gain value, thereby turning a modest initial investment into a profit. Long-term gold investments do come with risks, especially in more recent years. However, many investors still consider money sunk into gold to be a smart decision.
Lastly, gold is a precious material. Pure gold- and gold-plated jewellery are luxury items. It should be obvious, however, that in the grand scheme of finances, gold’s use as a precious metal is it’s least important.
The truth is that gold and bitcoin have several comparable characteristics. Bitcoin is also good as a hedge against inflation. It can also act as portfolio diversification, and it can act as a long-term investment. The comparison perhaps isn’t 1 to 1. However, there are still several ways in which Bitcoin may be considered digital gold.
On the other hand, some financial experts are sceptical about referring to Bitcoin as gold. These experts argue that the only way in which Bitcoin and gold are similar is that they are both dependent on investor confidence. This is to say, gold remains so valuable given that confidence in its value is so high. The same is true for Bitcoin. Only the big difference is that gold has had its value since 1500 BC. Bitcoin, on the other hand, can’t boast such a lengthy history.
Looking at it another way, the 2000-year history of gold shows the commodity consistently gaining value. The brief history of Bitcoin, meanwhile, is extremely turbulent and unpredictable. There is simply no way to know for sure if Bitcoin will or won’t be worth more than its current value in 10 years time. Hence, although there are similarities between the commodities, most financial experts would consider gold the safer bet.
On the other hand, Bitcoin is still a good investment for several reasons. Bitcoin currently happens to be a less stable investment than a precious material. But it doesn’t mean that this is always going to be the case. As Bitcoin becomes more widely accepted and as financial experts continue to put their own money into crypto, the future of digital assets looks bright.
So, while an investment in Bitcoin may not presently be a guaranteed success, it may potentially actually be a better investment than gold could ever hope to be. After all, gold gains value slowly but steadily. Bitcoin may gain value rapidly, potentially making it a far better long-term investment.
For those looking for a rock-steady long-term investment guaranteed to hold steady, gold is the way to go. The bottom line is that Bitcoin isn’t necessarily a good gold equivalent. Bitcoin is, however, still the longest-running, most valuable crypto by far. BTC has thrived much longer than most naysayers dare to admit, seeming to suggest that the history of crypto is still in its infancy. As far as the crypto market is concerned, there is no better or smarter investment than Bitcoin. Even if that investment offers no guarantee.
Another way to look at it is that as far as gains are concerned, Bitcoin has the gold beat hands down. The value of Bitcoin has skyrocketed, outperforming gold in the short term.
Gold isn’t necessarily the best equivalent for Bitcoin. Although there are some similarities between Bitcoin and gold. These similarities are mostly in how bitcoin is leveraged. Gold is, however, a far more stable commodity. Gold has historically slowly but steadily gained value since 1500 BC. The history of Bitcoin is much shorter, making it impossible to determine how much BTC will be worth in even just a few years.
On the other hand, Bitcoin is ideal for portfolio diversification and as a risky long-term investment.
Originally, bitcoin was created as a peer-to-peer currency. However, most people no longer use BTC in this way. Now, BTC is a crypto store of value. In this regard, gold and Bitcoin serve a similar purpose.
However, gold also has value as a physical commodity. Gold is put to use in the making of jewellery and has other practical applications. So, although Bitcoin serves the purpose of an investment commodity, it will never have a practical purpose. Hence, gold and BTC are not a good comparison.
Yes, gold is amongst the most liquid, diverse, and flexible trading assets in the world. It’s easy to invest in gold. Plus, the investment value is almost a guarantee. Plus, it’s easy to buy and sell gold. For all these reasons gold is amongst the most sought-after and valued commodities currently available. The chances are high that gold will continue to be valuable into the foreseeable future.
Bitcoin, and other cryptos, have only had a very short time to prove their worth. As to whether BTC is or isn’t a good investment is a matter of opinion, however, cryptos do have enormous potential. Bitcoin has already made several traders rich and will probably continue to do so. As to whether Bitcoin will be more or less valuable in the future is unknown.
To put it simply, Bitcoin is risky, but potentially a very lucrative investment. Gold, on the other hand, is a good investment, but an investment that is unlikely to create any surprise millionaires.
As to whether you should invest in Bitcoin or gold will depend on your appetite for risk. Gold is a safe long-term investment though it won’t gain value beyond a certain point. Bitcoin is a riskier investment, though offers the potential to gain an enormous amount of value in a short period.
