bitcoin

Why Bitcoin Doesn’t Compare to Gold

May 30th, 2017 by

Especially since 2017 began, the fully digital cryptocurrency Bitcoin (BTC) has been squarely at the center of the financial news due to all of its wild price swings. (More on that below.)

Bitcoin, as the most popular and trusted “currency” of its kind, has a strong appeal to investors who are seeking alternative currencies to the dollar or other forms of fiat money. Given the risks inherent in the global financial system, this is an understandable and justifiable motivation.

Gold is similarly valued as an alternative asset with important monetary properties. However, it’s worth exploring why the popular comparison of Bitcoin to gold is hardly an apples-to-apples match.

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Bitcoin vs. Gold

Gold is considered by many to be a legitimate currency in its own right. (The U.S. Constitution tends to agree.) It’s often used as a way to safely store some of one’s wealth in a tangible form that is separate from any bank account.

The same can be said of Bitcoin. It works on a peer-to-peer network—in other words, someone has to be willing to accept your Bitcoins as money. They’re not obligated to, as they are with fiat dollars (Federal Reserve notes, technically). Bitcoin is also decentralized, meaning there is no single authority (like a central bank) that manipulates the supply of Bitcoins. There is a fixed amount of them.

This is where the similarities largely end.

The reason this comparison has become increasingly prevalent is because, on a nominal level, the price of Bitcoin recently surpassed the gold spot price for the first time ever. (Bitcoin first started trading openly in about 2013.) Moreover, BTC didn’t stop there, zooming past gold and more than doubling the yellow metal in price.

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However, Lorcan Roche Kelly for Bloomberg News convincingly explains why this really tells us nothing:

“By the time the supply of new bitcoins ends, sometime after the year 2110, there will be 21 million bitcoins in (digital) existence, meaning the total value of all of the electronic tokens that will ever exist, at today’s market price, is just under $39 billion. According to the World Gold Council, total gold stocks amount to approximately six billion troy ounces, or $7.3 trillion at today’s price.

“To put it another way, in order for bitcoin to be worth more than gold, one ‘coin’ would have to trade at $347,000 in order for ‘bitcoin worth more than gold’ to be a defensible statement.”

So, just because one Bitcoin is valued at over $2,000 doesn’t mean it’s “worth more” than gold. It’s silly, frankly, to compare gold to Bitcoin (or to any other cryptocurrency) in this manner. That’s an overly simplistic way of looking at things. The same is true of stock prices: Just because one company’s stock price is higher than another’s doesn’t necessarily mean that company is worth more as a whole. It may have simply issued less shares.

Boom & Bust

The more important point is that Bitcoin prices have experienced violent volatility since it began trading. That volatile roller-coaster ride has only intensified as the BTC price recently logged new all-time highs. People were raising their eyebrows when prices shot past $1,200 and $1,400, and eventually peaked at $2,800 before crashing back down to earth. All of this action happened in a very short amount of time.

When you look at its history, a familiar pattern for Bitcoin begins to emerge. Its price will soar higher when there is some excitement that the cryptocoin will gain wider acceptance as a payment system or unit of account. Inevitably, when these expectations are not met, enthusiasm (and the markets) fall back.

These dramatic price undulations are unlikely to change in the near future, as Bitcoin’s future remains unclear. While some companies and governments are moving closer toward accepting payment in Bitcoin, there is still confusion over its status: the Commodity Futures Trading Commission (CFTC) has classified it as a commodity, not a currency, which complicates matters.

The real dividing line between gold and Bitcoin is that the latter is not a reliable store of value. This is obvious from one look at the long-term price chart for BTC. Trust is another factor that doesn’t work in Bitcoin’s advantage, as its exchanges and servers have been subject to hacking and theft in the past. Despite the shiny images of physical “Bitcoins” above, these are merely representations of the idea of Bitcoin. In reality, Bitcoin is an electronic token, as Kelly described it earlier.

Bitcoin’s value is based on its scarcity, as there are a limited number of total “coins” out there. However, it is a purely speculative market—unlike gold, where the costs of digging up and refining the metal give a clear picture of why its price is so high. Sure, Bitcoins must be “mined” by computers, but even this process is murky to the average person, as the ridiculous gif below demonstrates.

When it boils down to it, no matter how often the comparisons are made, gold and Bitcoin are used for two different things. Gold is a long-term store of wealth; Bitcoin may have a bright future someday, but it is a speculative novelty at the moment. Gold is an investment in a tangible asset that you can hold, and can’t be deleted from a digital ledger on a computer screen; Bitcoin is the farthest thing from tangible. You would never think of spending small portions of a gold bar on a pizza delivery, yet this is actually a fairly common use for Bitcoin fractions.

It may be the focus of attention right now, but Bitcoin has a long way to go before it can be taken as seriously as the precious metals, with their millennia-long track record.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.