Bitcoin Vs Gold Asset Showdown
Bitcoin or gold – which asset deserves a place in your financial portfolio? The recent rise of Bitcoin and the cryptocurrency sector, in general, has caught the attention of both financial experts and the investing public. With experts such as John McAfee predicting a Bitcoin price of $1 million by 2020, should you hop on the BTC train now before you miss out on the future of money?
Gold has a rich legacy as money for thousands of years, and the first gold coins were produced in Lydia by Croesus in the 6th century BC. The modern fiat currency system came to power with the removal of the Bretton-Woods gold standard by Richard Nixon in 1972. This decree meant that the yellow metal no longer backed the U.S Dollar. Instead, it had become a ”fiat” currency, backed by nothing other than the faith of the citizens of the United States in their government.
Which asset makes for a better investment? To present a valid argument for both gold and Bitcoin, one should compare their characteristics against the principles of sound money.
What Is Sound Money?
The concept of sound money comes from the need of a market-accepted currency system that cannot be debased by governments. The principles of sound money consist of seven factors – do gold and Bitcoin stack up to them?
- Medium Of Exchange – Societies need a medium of exchange for trade accepted at a standard value between parties.
- Unit Of Account – A nominal monetary unit of measure which represents the value of goods and services.
- Portable – Money must be portable, easily transported across borders and stored.
- Divisible – Divided into smaller increments for exchange.
- Fungible – One unit of money is the same as all other money units, i.e., a standardized Size And Value.
- Durable – Resistant to handling, as well as general wear and tear.
- Store Of Value – Money should hold its value over long periods of time.
The Case For Bitcoin Digital Store Of Value
Bitcoin has enabled anyone with a mobile device the ability to trade currency online. BTC gained infamy as the currency of the ‘Dark Web', where it was used to fund shady deals in illegal online marketplaces to secure anything from drugs to a hired hitman. Half a decade later, Bitcoin is now accepted by many large online retailers as a form of payment, with more companies joining the BTC revolution every day.
The smallest division of Bitcoin is known as a “Satoshi” (0.00000001 BTC). The Satoshi provides Bitcoin with the ability to divide far greater than that of gold. Storing Bitcoins in a “hard wallet” such as a “Trezor,” allows a Bitcoin holder to store as much BTC as they like in a lightweight, compact space.
Bitcoin lacks in its durability and store of value. If a user loses their private keys, the coins are gone forever. Estimates show that over 4 million Bitcoins have been lost due to people either losing their private keys or hardware holding their wallet. Bitcoin is also well known for its price volatility, with two bubbles occurring in the last five years.
Final sound money score: 5/7
The Case For Gold Traditional Store Of Value
The role of gold in the modern economy has shifted dramatically over the last 45 years since the end of the Bretton-Woods “Gold standard.” Gold is now governed by a market price that is set by traders twice a day. The trading of gold coins for fiat currency is a common practice in almost every country around the world. However, practically no retailers or merchants will accept gold coins for goods and services.
Gold is heavily regulated by global financial authorities, and many countries have stringent anti-money laundering and tax evasion policies in place that limit the movement of gold through borders. Therefore, while gold may meet many of the requirements of sound money, it does not satisfy the characteristics of divisibility and portability in the same manner that Bitcoin does.
Final sound money score: 5/7
The Bitcoin Vs Gold Asset Showdown Winner Is…
Gold. While blockchain technology is here to stay, Bitcoin may not be. The existential threats to the Bitcoin code make it untested and unproven as sound money.
Bitcoin may fulfill more of the traditional roles of money than gold. However, it lacks the history and credibility of the yellow metal. With uncertainty around geopolitics and global finance, gold will remain to be the safe haven asset of choice for investors and traders.