Bitcoin versus Gold: Is Bitcoin the New Gold?

In recent years, this has been a frequent question for investors.

Oftentimes, Bitcoin and gold are pinned against each other, as journalists observe the rally in Bitcoin’s market value, speculating on the future of the two assets. 

It seems strange to compare gold and Bitcoin when they are in fact two very different financial instruments. As it will be explored further, despite the many similarities that they share, these are far outweighed by their significant differences. 

On the whole, when observing the potential face-offs between the two in today’s technological environment, the outcome is favourable for precious metals. 

What is Bitcoin (BTC)?

In 2009, Bitcoin was created as an electronic currency which, unlike conventional currencies, came on to the financial market as a decentralised option, eradicating the need for a bank or financial institution to act as an intermediary. Instead, transactions are recorded in a public database, which is then distributed on the Bitcoin blockchain network. 

The network enables the anonymous, peer-to-peer exchange of virtual coins (or fractions of them), as transactions that cannot be manipulated, duplicated or destroyed. These transactions are broadcast to several computers which act as ‘nodes’ on the global Bitcoin network, to verify the records as accurate. 

To date, Bitcoin has never been hacked or compromised, because to do so would be extremely difficult, if not impossible. This can be attributed to vast amounts of energy supply needed to power the Bitcoin network, such that one Bitcoin transaction uses nearly the same amount of electricity as a British household in two months. 

For certain institutions like central banks or governments, the possibility of taking full control of cryptocurrency transfers and transactions is well out of reach. 

Gold and Bitcoin: What are the differences?

Tangibility

Gold is a tangible, raw material with even its derivative contracts linked to an underlying value of physical gold that follows the same price valuation trend. 

Unlike precious metals, virtual or digital currencies have no intrinsic value, rather, they are mechanisms for exchange. For a large proportion of the globe, the value of digital currencies comes from their ability to act as a utility, that can be transferred, transacted and exchanged peer-to-peer. 

History 

Gold, as we know it, has been used as a material since antiquity, with its unique properties that have enabled its survival through bloody wars – and even tempestuous market conditions. 

The other competitor, Bitcoin (and virtual currencies) has been present in human history for just over a decade, leaving much still to be understood about the full extent of their impact on money as we know it today. 

During this time, Bitcoin has experienced everything from major price growth and subsequent declines, to hacking scandals on compromised crypto wallets. With a backdrop of high volatility and triumphant advertisement from crucial figures like Elon Musk, the future of cryptocurrencies continues to divide and spark opinion.

Demand

On the whole, the global demand for gold has been relatively stable over time, within even significant variations in the range of 5-10%. Underpinning that stability is the fact that demand comes from different sectors, such as industry and jewellery, in addition to central banks and investors. 

The relationship between these two sectors is often inversely correlated, such that during an economic crisis, demand from the jewellery and industrial sectors will tend to fall while increasing from the investment sector. In times of economic expansion, the scenario will likely be reversed. 

The same cannot be said to apply to the cryptocurrency market, which is still in its infancy. Prone to volatility, the value of Bitcoin, as with other cryptocurrencies, moves in extreme cycles that resemble sharp spikes and dips. 

Market capitalisation

Despite its multiple rallies, Bitcoin’s market capitalisation has never come close to that of gold. Speaking of which, it has been estimated by the World Gold Council that gold’s market cap sits at around $10-11 trillion. This figure is around 8 times more than the market capitalisation of Bitcoin and around 5 times more than the entire cryptocurrencies sector.

Moreover, even if Bitcoin has a key role to play, the total value of cryptocurrencies is divided between more than 10,000 different e-currencies. This offers a fragmented picture of the cryptocurrency world, making it more difficult to make a comprehensive assessment of the sector. 

Furthermore, certain cryptocurrencies may cease to exist in the future. It is gold that remains ever-present in the world, even if it is lost, stolen or hard to recover – at the depths of a sunken ship, for example. This too could happen to Bitcoin.

At the same time, large quantities of gold are held by individuals as family treasures, with jewels stored privately across the five continents. The World Gold Council has estimated that this gold tucked away amounts to around 90,000 tonnes, effectively reducing its availability on the market by 45%.

The similarities between Gold and Bitcoin

Finite Supply

One possible common feature of gold and Bitcoin though is that supply seems to be finite. The total number of Bitcoins that can be “mined” is equal to 21,000,000 units, which should be mined completely by 2140. About 50% had been mined by 2014, and 75% by 2017. The pace then declined progressively, with energy costs making the activity increasingly uneconomical – regardless of Bitcoin’s market price.

Gold’s current global supply is also limited, with known reserves estimated by the World Gold Council at 57,000 tonnes. However, there are two limitations. First, the quantity is finite, secondly, some of that gold is practically impossible to extract, or at least it is not economical to do so at the current market price. For example, consider the gold that is buried under mountains or located underwater in the middle of the oceans.

Price Comparison

Some similarities have been found analysing the gold rush of 2002-2011 with Bitcoin rallies. From a technical viewpoint, the gold prices jumped from around $250 to a peak of $1,920 in the span of a decade.

Bitcoin’s explosion was much quicker and corrections were also much sharper. All this is telling of the crypto market that is just getting started, with significantly higher volatility. 

In a few words, the possibility of reaching higher returns could be greater. However, as many investors may have already experienced first-hand, the possibility of facing sharp declines or sometimes collapse can be detrimental to a portfolio. 

Needless to say, Bitcoin is not yet gold and will probably never become like the precious metal. Gold is still widely accepted as the preferred safe haven for investors.

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.