Bitcoin has been dubbed “digital gold” by those who invest in the cryptocurrency. They’re essentially saying that it has the same properties as gold in terms of an investment asset.
In fact, in his book on the history and people of Bitcoin called Digital Gold, Nathanial Popper charts many similarities to the rise of gold in the financial world. Of course, the history of Bitcoin is significantly shorter than that of gold and a lot of action has been crammed into just over a decade.
So, why exactly are people likening Bitcoin to gold as an investment asset? Let’s start by taking a closer look at gold itself.
Due to the rarity of the metal and the inherent beauty of the metal, gold has always held a fascination for human beings. Gold has been considered valuable since it’s very first discovery. Most sources recognize that people first started using it as a form of currency around 550 BC – making it the oldest currency still in use to this day.
In modern times, we might not actively trade with gold – meaning we don’t carry around gold coins and use them to pay for goods and services anymore. However, it is still considered a currency and an incredibly valuable asset that you can hold or trade as an investment.
Gold is considered a hedge investment. It’s offered incredible stability over the long term and prices per ounce don’t fluctuate wildly, even when the market is dropping. People who hold gold assets will know that their investment won’t suddenly drop in value when a recession or serious economic downturn hits.
One of the bonuses of investing in gold is that it actually often takes an upswing in value when the economy is down. Gold is seen as a secure investment, meaning people look to buy gold when the market is taking a dip. This, in turn, raises the price of gold per ounce even though the markets and stocks are suffering.
Gold is a low-risk investment that will hold steady in its value. Most serious investors will hold some gold in their portfolio as a means of hedging long term against the fluctuations that can happen in the short term.
It might seem like an unexpected comparison – Bitcoin and gold. However, the two have quite a bit in common from an investment perspective.
For one, there is a capped supply for both assets. There is only so much gold in the world. Sure, there is still some left in the ground that is waiting to be mined and many hold out hope that they may yet find a new deposit of the precious metal somewhere in an unexplored region of the world. It’s the scarcity of gold and the fact that it is a finite resource that makes it so valuable.
Bitcoin is also capped at a finite supply. The creator set a specific number of tokens that are available to be mined electronically and that is it. This controlled supply gives Bitcoin and other cryptocurrencies a similar value attribution to gold – there is only so much that you can hold or use to trade.
Those who have confidence in Bitcoin and the other major cryptocurrencies have taken this similarity and put forward the notion that the digital currency is just like gold in terms of an investment vehicle. There are three points to consider in this argument:
Of course, there are some major differences between gold and Bitcoin. One is a naturally occurring precious metal while the other is a digital asset that has been manufactured by man. There are also several other differences that are worth considering when looking at your investment portfolio:
The obvious starting point is the age of the asset. Gold has been around as long as the Earth has, and people have been using it as a form of currency for well over 2000 years. Bitcoin was launched in 2009 and it took a couple of years for the general public to understand the concept behind a decentralized cryptocurrency. In fact, to this day some still are not entirely certain what Bitcoin is and how it operates or what its uses and value are.
The reason the age of the two assets is worth considering for investors is that for a long-term investment, you want to look at track records. Gold has a solid track record as an investment commodity that goes back decades. Bitcoin, on the other hand, has only a couple of decades to show a track record. However, it was born out of a recession and survived (and thrived) through the economic chaos of the pandemic.
This point links strongly to track record once again. Gold has a long-term track record of offering stability against market fluctuations, making it the top choice as a hedge investment. Over long periods – a decade or more – you are pretty much always going to see a return on your investment.
Bitcoin, on the other hand, is a lot more volatile. It might not be linked to market fluctuations, but it is still a new investment option that people are only able to speculate about. Since its mass adoption, investors have seen massive highs that have plunged to record lows very quickly.
What is important to note, though, is that the cryptocurrency has so far always climbed back up to provide solid returns. The key with investing in Bitcoin is that you need to look at it as a long-term investment and have the ability to ride out the lows.
Speaking of highs, it’s always important to consider the returns you’ll get on your investment. With gold, you are pretty much guaranteed that you’ll see an increase over the long-term. The point is that this increase isn’t likely to be much. In the period of 2011-2021, gold saw an average annualized return of only 1.5%.
In that same period, Bitcoin showed an average annualized return of 230%. Even through the volatility and the crypto-winter of 2018, Bitcoin outperformed every other asset and stock on the global market.
This is a key difference when comparing the two. Gold is a stable asset that won’t lose value when the rest of your portfolio is likely struggling in a bad market, meaning you will always have something to use. Bitcoin is a volatile asset that will go through peaks and troughs, meaning you need to monitor your investment and stay committed to see those high returns.
Due to its age and consistent use in human finances, gold is a heavily regulated asset. It’s illegal to transport it across borders without express permission from the regulatory bodies in both countries. Additionally, the system used for placing value on gold is governed by a well-established system for weighing and tracking.
Bitcoin is a bit different because the very nature of cryptocurrencies is for them to be anonymous and decentralized. A few countries have placed restrictions on the use of Bitcoin and the other cryptocurrencies, but the online nature of them makes it somewhat difficult to enforce the regulations.
Finally, it’s good to look at the uses of the two when comparing them. For all intents and purposes, as an investment vehicle, they are fairly similar. You are owning them as an asset, with the aim to see a return on your investment.
Both Bitcoin and gold are also used as currencies – although Bitcoin is more of a regular currency than gold these days.
The major difference comes in when you see that gold has several other uses. It’s a luxury item used for jewelry and art. As a metal with specific properties, gold is also used in electronics and machinery.
Of course, these uses don’t necessarily have a big impact on the decision to invest in one or the other.
The major benefits when you invest in Bitcoin are clear:
In conclusion, it’s not truly possible to say that Bitcoin is the better investment over gold, or vice versa. There is a lot that will rest on your style of investing and what level of risk tolerance you have.
Even with the nickname “digital gold” and the many similarities between the two, you can see that there are some major differences that will impact a decision to invest. Ultimately, both provide a solid argument for investing in them. Gold gives you long-term stability and Bitcoin gives you incredible annualized returns even through volatile periods. The key thing to remember is that both are long-term investments and not a means for making a quick buck.
There’s a lot to think about when choosing between gold and cryptocurrencies, especially if you’re new to investing. Here are some important details to know:
Bitcoin and gold are both considered to be long-term investments. However, Bitcoin is largely considered to be for the investor with a high-risk tolerance due to the volatility of the cryptocurrency. Gold is definitely a low-risk investment that will slowly increase in value over the years.
A digital asset is anything that lives in a digital form. This can be anything from a digital photo to cryptocurrencies like Bitcoin. Value and ownership need to be placed on these assets, and they need to be discoverable – even if it is just by the owner.
In terms of an investment, cryptocurrencies are the most common digital assets. However, non-fungible tokens (NFTs) are also starting to become investment opportunities for digital assets.
Digital gold is a term that was coined by those who back Bitcoin. It can be broadly used to refer to any cryptocurrency but is mostly linked to the original – Bitcoin.
The name comes from the theory that Bitcoin is a lot like gold in terms of an investment asset. Neither are particularly linked to market fluctuations and exist outside of currencies and monetary values regulated by individual countries.
There is no definitive answer to this question. However, Bitcoin is the original cryptocurrency and has been far more widely adopted than any of the others. This means that there are more people using Bitcoin and more retailers and businesses accepting Bitcoin as a form of payment.
Other important or notable cryptocurrencies to watch and potentially invest in include Ethereum, Tether, USD Coin, Binance Coin and XRP.
A hedge investment is one that limits your risks as an investor and the aim is to keep such an investment as a counterbalance to stocks that are more volatile. It’s referred to as hedging when you strategically invest in something that isn’t volatile as well as stocks that can move with the markets.
Something like gold is a good hedge investment because the value of your investment usually increases when the markets take a downturn. This means that if you have multiple investments – stocks, bonds, and gold – not everything in your portfolio will decrease in tougher economic times.