For some crypto enthusiasts, Bitcoin is the future of money and investing. Some may have traded in their gold for Bitcoins. However, when comparing gold and Bitcoin, we need to consider how they’re compared as alternative assets, rather than as one versus the other.
To help understand those differences better, we spoke with Dave Kranzler, a hedge fund manager and precious metals analyst.
According to Kranzler, Bitcoin and crypto have caught on a lot in recent years. That’s thanks to a mixture of “dissent, greed, idealism, and the fear of missing out.”
When comparing the two, his opinion is that the outcome is generally favourable for precious metals over Bitcoin. That’s even taking into account Bitcoin vs gold in today’s technological environment.
“Precious metals are an uncompromised guarantee of stability. Gold has strengthened in value throughout history. It has steadily climbed, regardless of global crises.”
In this article, we explore the Bitcoin vs gold debate. We consider their differences and similarities and check in with Dave Kranzler about which is the better and more stable investment.
What is Bitcoin (BTC)?
In 2009, Bitcoin launched as an electronic-only currency. Unlike conventional currencies, it came onto the financial market as a decentralised option. This was an alternative system that removed the need for a bank or financial institution to act as an intermediary.
Blockchain technology enables the anonymous, peer-to-peer exchange of (fractions of) virtual coins. No one can manipulate, duplicate, or destroy Bitcoin transactions as a result.
Central banks cannot print Bitcoins when the economy is struggling, as they would with any other fiat currency, such as the US dollar. The decentralised nature of Bitcoin makes it resistant to control by any entity, including governments.
“These are key features that attract many to Bitcoin. The idea that it’s free from governmental control and central bank interference is a significant selling point for many.
“Although appealing at first glance, crypto does not protect your capital in the long run. Instead, it fluctuates capriciously, governed solely by supply and demand. It provides investors with high risk and dynamism.“
Unlike gold, Bitcoin is subject to price changes that can result in substantial losses. That’s especially for those who don’t have a deep understanding of the crypto and digital assets market.
It is crucial for investors to be aware of this volatility and not invest more than they can afford to lose.
In theory, its extreme volatility makes it an excellent vehicle for short-term investments. But it doesn’t provide guaranteed profit or security.
Many investors confuse the two stores of value. Bitcoin isn’t backed by gold, but there have been attempts to create a gold-backed cryptocurrency.
Gold and Bitcoin: What are the differences?
Gold is a tangible, raw material. Even its derivative contracts are linked to an underlying value of physical gold that follows the same price valuation trend.
“Gold holds its unshakeable position as an ultimate safe haven. It has invariably functioned as a store of value and the most reliable currency since the beginning of money.”
Unlike precious metals, some virtual or digital currencies have no intrinsic value. Rather, they may be stores of value or mechanisms for exchange. They can also function as a new type of payment method.
For many investors, the value of digital currencies comes from their ability to act as a utility. The fact that you can transfer, transact and exchange them peer-to-peer gives them utility.
We ask Kranzler if Bitcoin has the capability of becoming a digital successor of gold.
“Absolutely not.” He says. “It lacks the precious metals’ inherent value and cultural heritage. It also fails to show stability and long-term credibility.”
People have used gold, as we know it, as a material since antiquity. Its unique properties have endured throughout millennia and protected it in the most turbulent market conditions.
Kranzler tells us: “Gold has emotional, cultural, and financial value with people across the globe. People, governments and institutions buy gold and silver for vastly different reasons.
“A range of factors are responsible for this. For example, socio-cultural factors, local market conditions and wider macro-economic drivers.”
On the other hand, Bitcoin’s history is significantly shorter. It’s only been around since 2009. This shorter timeline does not provide as much data for investors. As a result, investing in Bitcoin can be seen as more risky.
This short life span means we still don’t understand the full extent of Bitcoin and other cryptocurrencies’ impact on money as we know it today.
However, in this short time, Bitcoin has experienced many different developments. For example, it’s gone through periods of major price growth followed by steep declines.
Investors have even had to put up with hacking scandals on compromised crypto wallets. Specifically, unsecured wallets, such as those not using 2FA or those stored on an exchange.
The future of cryptocurrencies continues to divide opinions. High price volatility and on-off backing from notable figures like Elon Musk serve only to confuse further.
The constant fluctuation in Bitcoin’s value also makes it difficult to use as a stable store of value. This is the role that gold has successfully filled for millennia.
On the whole, the global demand for gold has been relatively stable over time. That’s even within significant variations in the range of 5-10%.
Underpinning that stability is the fact that demand comes from different sectors. Industry, jewellery makers, central banks, and investors see and understand its value.
This supports the price of gold, according to Kranzler.
“Different sectors of the gold market rise to prominence all the time. That’s governed by the different points in the global economic cycle.
“There’s a diversity of demand. The self-balancing nature of the gold market underpins its robust qualities as an investment asset.”
The relationship between these two sectors is often inversely correlated. For example, during an economic crisis, demand from the jewellery and industrial sectors falls. At the same time, investor demand increases.
In times of economic expansion, it’s the other way around.
Even the most ardent Bitcoin investors agree that the coin does not benefit from the spread of demand from different sectors gold enjoys. Many only invest in it in the hope of a significant upward price bounce. Sometimes, they get the sharp spikes they want, other times catastrophic dips.
Kranzler tells us:
“Volatility characterises the crypto marketplace. When investors want a safe haven, Bitcoin and crypto more broadly are not their first choice.
“Bitcoin’s sharp drop in value on various occasions in its history is a perfect example of the risk. It would be prudent to follow the 5% rule. In other words, don’t put more than 5% of your portfolio into risky assets like crypto.”
Gold’s market capitalisation vs Bitcoin’s
Bitcoin’s market capitalisation has never come close to that of gold. That’s even when the digital token’s value was at an all-time high.
The World Gold Council estimates that gold’s market cap is around $10-11 trillion. This figure is around eight times more than the market capitalisation of Bitcoin.
It’s five times more than the entire cryptocurrency sector. That’s not taking into account that the value in the sector is the sum of more than 10,000 different e-currencies.
The fragmentation of the cryptocurrency market makes it harder to come up with an accurate assessment of it. The overall market cap can swing dramatically in a short period of time. This can lead to rapid shifts in value that are rarely seen in more established and stable markets like gold.
Furthermore, in the future, regulatory crackdowns by governments worldwide may pose a threat to cryptocurrencies, including Bitcoin.
In contrast, individuals hold large quantities of gold as family treasures. They store jewels made with metal across the five continents.
The World Gold Council has estimated that this gold tucked away amounts to around 90,000 tonnes. This has effectively reduced its availability on the market by 45%.
The similarities between Gold and Bitcoin
The total number of Bitcoins that can be “mined” is equal to 21,000,000 units. GPU miners should have won all available Bitcoins completely by 2140.
GPU miners had mined 50% by 2014 and 75% by 2017. The pace since then declined progressively. That’s because an algorithm controls the mining of Bitcoin. A new block appears on the chain approximately every 10 minutes.
However, this isn’t considering halvings. Mining continues to be more and more difficult, and every four years the rewards for successfully validating blockchain transactions are halved.
Energy costs also make mining increasingly uneconomical, regardless of Bitcoin’s market price.
Compare that with gold. Gold is hard to find. When miners find it, they need to spend heavily on human labour and heavy machinery. Political instability, environmental regulations, and other external factors put that investment at risk.
The World Gold Council estimates there are around 57,000 tonnes of gold in the world. However, that may be overstating it.
This is because some of that gold is practically impossible to extract. That also involves gold that would not be economical to mine at its current market price. For example, consider the gold buried under mountains or underwater in the middle of the ocean as examples.
Some point out the similarities between the gold rush of 2002-2011 to Bitcoin rallies. From a technical viewpoint, the gold price jumped from around $250 to a peak of $1,920 in the span of a decade.
Bitcoin’s explosion was much quicker and its corrections were also much sharper. All this tells us is that the crypto market is just getting started. Significantly higher volatility will continue.
The rapid rise in Bitcoin’s price led some to draw comparisons to other speculative bubbles. It reminded many of the dot-com bubble of the late 1990s or the housing bubble that preceded the 2008 financial crisis.
Some of these comparisons may not be entirely fair, but they do highlight the risks associated with investing in a highly volatile and relatively unproven asset.
With Bitcoin, much higher prices may be around the corner. However, many crypto investors have already experienced the opposite of sharp declines and even collapses.
Kranzler weighs in, saying:
“Although appealing at first glance, Bitcoin does not protect your capital in the long run.”
Gold or Bitcoin?
Needless to say, Bitcoin is not yet gold. Gold is still widely accepted as the preferred safe haven for investors.
This is in part due to its lengthy history and well-established role in the global economy. governments, central banks, and investors have long relied on gold as a hedge against inflation. They view it as a safe-haven asset in times of economic uncertainty and a means to preserve wealth over the long term.
Summing up, Kranzler says:
“Gold has been an asset that holds value over long periods. Investors use it to hedge against market downturns.
“In a cycle of low and negative real interest rates, nothing rivals gold. It’s the ultimate hedge against economic, macro, and geopolitical uncertainty, nothing rivals gold.”
In contrast, Bitcoin’s track record is much shorter. It has yet to prove itself as a reliable store of value or hedge against inflation. Its price is much more volatile. And it lacks the broad-based acceptance and institutional backing that gold enjoys.
As Kranzler states, gold is indispensable as an asset in portfolio diversification and wealth preservation.
“Bitcoin does have potential as a speculative asset and a means of diversifying a portfolio. However, it does not yet offer the same level of security and stability that gold does.
We’ll have to wait and see whether it will ever be able to fulfil the role that gold currently plays in the global financial system.
Carlo Alberto De Casa is Market Analyst for Kinesis Money.
He also writes as a technical analyst for the Italian newspaper La Stampa.
Carlo Alberto provides regular commentary for UK outlets including the BBC, Telegraph, the Independent Bloomberg & Reuters. He is also a commentator for CNBC Italy. He worked for Bloomberg as their Equity Research Fundamental Analyst before joining brokerage ActivTrades in 2011 to specialize in currency markets and commodities. In 2014 he published a book on gold and the gold market, followed by a new updated edition in 2018.
This report is not an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance.