Gold is a precious mineral that has had a dominating presence for centuries. It is a vital component in the construction of jewelry and other various forms of art throughout history. Beyond items of visual pleasure, gold is also used to create coinage. It is a mineral that holds a great deal of value and has been indicative of one’s wealth for many a year. Its reputation for being a lavish commodity is enforced by entertainment media, sometimes having the antagonists’ goal be obtaining gold.
Admittedly, this is somewhat of an obsolete practice; at least in more developed nations. It is not a primary form of currency anymore, but it still holds some merit. The extravagant metal still leaves a strong impact on the value of those currencies. In addition, there is a substantial correlation between its value and the durability of currencies trading on foreign exchanges.
Regardless of the strength gold still holds in some areas, the world of currency is changing. Nowadays, the primary form of currency is physical cash, along with payment cards such as credit and debit. Rarely will you see an average person walk into a bank to deposit a piece of gold. Further emphasizing the changing times is the fact that money is becoming more digital. In the past decade, we saw a rise in the popularity of cryptocurrency. In fact, there are some services that give you the option of paying with traditional cash or digital cash.
So, is there a reason to invest in gold anymore? Would gold or cryptocurrencies like Bitcoin make a better long-term investment?
What are these types of currency?
You can interpret the choice of investing in gold or Bitcoin in one of two ways. You can view gold as the obvious choice, seeing as how it has many years of recorded use to back up its value. On the other hand, Bitcoin is the most lucrative cryptocurrency and digital cash is a popular form of currency anyway. Going off of what’s on the surface, the choice is tough to make.
We first need to go over what makes the two so different, as well as popular.
Gold is a chemical element with a long history of being a sought-after mineral, as an asset and an ingredient. As mentioned before, it is useful in the creation of jewelry, art, and currency, among other things. It got its start as a form of currency as far back as 600 BC with the Turks using it as such.
Bitcoin is a peer-to-peer virtual currency that cryptography secures to prevent any potential instances of double-spending and counterfeit. It is not a physical form of cash; it is, after all, virtual. Its storage is typically in a digital wallet either on a computer or in a cloud. It got its start in January of 2009.
When it comes to mining for gold, it is a lengthy process that requires plenty of hard work. With each passing year, hundreds of tons of gold are mined by various means. These include such procedures as the following:
- Placer mining – The mining of stream bed deposits for minerals
- Hard rock mining – Alternatively ‘underground mining’. This type of mining excavates hard minerals, usually ones containing minerals like gold, silver, and iron (to name a few).
- Byproduct mining – In which gold is not the primary product you are mining for.
- Gold ore processing – Alternatively ‘gold extraction’. This is a process that is mandatory for extracting gold from its ores.
Bitcoin, on the other hand, generates new tokens by way of a competitive and decentralized process. This special procedure goes by the name of ‘mining’, of course, but it is a different kind of mining. It resembles traditional mining in that the miners work to collect bitcoins in exchange for their services. It is a peer-to-peer procedure that uses computers to solve a series of complex mathematical problems. Solving a problem produces a bitcoin.
All in all, the mining process for gold is comparatively strenuous in a physical sense. While bitcoin mining requires less labor, it is no less difficult due to the complexity of producing a single bitcoin.
A case for gold
There are an array of factors that make gold something of a “safe-haven” asset. Right off the bat, it’s evident that it is valuable as a material for consumer goods. What’s more, it is scarce. Disregarding the demand, the overall supply remains extremely low. It is impossible to manufacture gold in a way that’s similar to a company issuing new shares. Likewise, a federal bank continuously printing money. It is a substance that requires digging from the ground and processing in order to properly supply it.
Therefore, gold has little to no parallel with assets such as currencies, and stock indices like the S&P 500. There was once a time when gold was linked to the U.S. dollar. That is, until 1971 when President Nixon would sever the ties between U.S. currency and gold as a base. Since this separation, those who refuse to ride stock market swings to their full extent usually invest in gold.
In the event of a stock market correction, this precious metal helps soften the blow. As a matter of fact, it can even profit from it. For context, a stock market correction is when there is a decline of 10% or more. Generally speaking, gold is an ideal asset to possess while in a bear market.
Most of the time, gold performs quite well during corrections. The reason being that even if it does not rise per se, an asset remaining static while others decline is beneficial as a hedge. Furthermore, as more people outright leave stocks and instead invest in gold, the price will rise accordingly.
A case for Bitcoin
There are a lot of people who, in the past, refer to Bitcoin as “digital gold.” This is mostly because of its overall weak relationship with all other assets. This is especially true for stocks. Market participants might remember back in 2018 when the price of one bitcoin was able to surpass that of a single troy ounce of gold. This was the first time such a thing has ever happened.
At the time of this writing, Bitcoin’s price is over $10,000 in Canadian dollars. That seems like a lot of money, but really, how is it extremely valuable? The bigger question is should those who are running from stocks take cryptocurrency investment into consideration?
Much like gold, there is a limit to the total amount of bitcoin. What’s more, mining is the only way to get it, though not with drilling machinery. Properly mining for this digital currency requires the total computer power of its vast network of users. These users will process transactions on the blockchain in exchange for a small amount of bitcoin. At an estimated cap of 21 million bitcoins, demand has a powerful effect on what the cryptocurrency’s price will be.
Value in the element
Being an asset that has managed to preserve its prominence over the years, gold appears to have special immunity. That being invincibility towards technological disruption and evolution. Chris Burniske, blockchain products lead with ARK Investment Management, speaks of Bitcoin’s cultural distinctions. According to him, while Bitcoin is generating cultural significance, it is stuck at the “bleeding edge.” Moreover, there is a possibility of another cryptocurrency dethroning it.
Yet, against all odds, gold has been able to go onward and withstand the test of time. This is all while certain asset classes are facing a similar fate: booming and busting. Such things include dot-com companies and the US housing market. Gold, meanwhile, manages to plod through.
Josh Crumb, the co-founder of GoldMoney, says:
“People forget that gold is not a pet rock or a speculative asset, it’s an element. Gold is a very low-risk store of value. Fifty years from now it’s going to still be valuable.”
Inflation & Deflation
An additional advantage that Bitcoin has over gold comes down to its supply level. It is precise and transparent. It effectively mitigates fears of inflationary pressures that link to overproduction, which could potentially weaken the asset’s value. Burniske comments on this:
“A well-known characteristic about bitcoin is that it’s on a disinflationary supply schedule. While many people think of gold as being the same, gold is actually a sneakily inflationary asset.”
He adds that the global supply of gold has covertly been on the rise by 1-2% annually during the last century. He goes on to state the following:
“If you were to ask people what gold’s supply schedule looks like over time, they probably wouldn’t draw you something that looks like an exponential curve. With gold being sneakily inflationary, it’s not set up to preserve value in the way that bitcoin is.”
Theoretically speaking, these characteristics serve as a way to effectively increase Bitcoin’s future utility. Specifically, as a means of account, exchange, and storing value. Moreover, they make a suggestion regarding Bitcoin’s value, convenience, and significance to society. It indicates that those three factors will continue growing as economics becomes more digital.
Burniske writes in a recent whitepaper:
“As more infrastructure is built around [bitcoin], we think that demand will rise relative to its mathematically metered supply, increasing its price support.”
The obvious advantages that gold has over Bitcoin are the qualities of trust and reliability, according to many people. A lot of changes in the way we live are pushing Bitcoin away bit by bit. Some of these changes are consumer preference alterations, new technological disruption, or even a crackdown by a government.
Spencer Bogart, an analyst with Blockchain Capital, says:
“Gold has something very important that bitcoin lacks: a more than 1,000-year history of being a decent store of value. This is very important for trust and people’s willingness to store value in that particular asset.”
Even with attempts from the government to restrict its usage or outlaw it entirely, gold still proves to be of value. In 1933, President Franklin D Roosevelt enforced measures to completely prohibit and criminalize its possession within the U.S. Dave Kranzler of Investment Research Dynamics speaks of this mineral’s resilience:
“For more than 5,000 years gold and silver have been tried-and-true money. They’ve lasted basically the duration of organized civilization.”
In this sense, Kranzler was quite eager to bring attention to Bitcoin’s ‘counterparty risk’. The advantage gold has over bitcoin is that it does not rely heavily on the operation of the Internet. Hence, it has a degree of protection from strict governments. He says:
“There’s nothing to stop any government from shutting down the internet in their country under the guise of national security purposes or whatnot … We’ve seen democracies come and go, but totalitarianism always seems to creep back in. And when that happens, the government controls everything.”
Gold is an asset that will continue to be mined. Bitcoin, on the other hand, will eventually run out. The algorithm in charge of managing the blockchain rewards miners for their work in verifying and processing transactions. However, in as little as a decade, the supply will decrease rather quickly. This higher level of scarcity basically means that bitcoin could go on to have a higher price ceiling than gold.
Safe-haven or risky?
It is easy to assume bitcoin is the new gold because of the characteristics they share. It is portable, fungible, and does not deteriorate over time. Moreover, it has value despite having no cash flows. In certain moments, bitcoin shows noticeable signs of behaving like a traditional store of value.
At the same time, though, bitcoin is also a risk asset. It is a new type of currency. Like gold in its first decade, its long-term position in the world is not secure and it’s tough to determine. The result is it shares similarities with a variety of risk assets, such as stocks and venture capital investments. Whenever markets enter a risk-off mode, some will purchase it as a safe-haven. On the other hand, there are some who lose faith and ultimately sell to remove their risk.
Answering the question of which currency is the better long-term investment with “It’s subjective” seems lazy. However, in this case, giving a definitive answer would be difficult without implying a bias to one or the other. Bitcoin and gold have their fair share of advantages and disadvantages when you contextualize them in terms of investments that work in the long-run.
Perhaps there will come a time when the two can co-exist; being an ideal alternative for each other. As is, we can only watch their progress and make the investment choice for ourselves.