Bitcoin or gold? What is the safe bet for the future?
As bitcoin continues its meteoric rise, breaking new records, and surpassing the $1 trillion mark, more and more investors are evaluating a long-standing comparison between the famed cryptocurrency and another well-known asset class: gold. It is rare for Wall Street analysts to compare bitcoin and gold.
Bitcoin, often referred to as digital gold, is seen as a risky, speculative investment that aims to make a short-term profit. Gold, meanwhile, is considered a safe haven.
The rapid rise of Bitcoins to more than $57,000 per coin, underpinned by new investments by Tesla and other institutional names, has led some to question the old assumption about both assets. True, while one asset is more stable than the other, it can also be more volatile over short periods.
In 2017, the Bitcoin Investment Trust (GBTC) had a market value of $27.8 billion. The largest gold ETF is the SPDR Gold Shares (GLD) GLD, which is traded on the over-the-counter market and has a price per ounce of gold of just $0.37 per share and as much as $12.47 per share. In 2017, GBTC traded on over-the-counter markets at about $20 an ounce, while the price of gold was lower at $37.7 a share, peaking at $1,247 a share.
Ethereum co-founder Vitalik Buterin has tried to dispel popular misconceptions by comparing the relationship between gold and bitcoin. He told CNBC: ‘When you have gold and bitcoin, it means they have a number of similarities.
For one thing, gold is scarce, while bitcoin is a blockchain that is generally available to anyone with access to the Internet. Although there are obvious differences between gold and bitcoin in terms of security and global geography, there are a number of similarities between the two. If you use commodity prices as a proxy, they are very similar. Both are stores of value, and both have value relative to other commodities.
Despite its status as a foreign currency and the jurisdiction of most traditional investment vehicles, Bitcoin has taken established names on the stock market by storm. J.P. Morgan Chase, Morgan Stanley, Goldman Sachs, UBS and others have bought bitcoin. A fund linked to BlackRock, the world’s largest asset manager, is also interested in Bitcoin. Advertising adds a twist to the bitcoin story, with many high-profile investors flocking to buy bitcoin after the price of bitcoin plunged from its all-time high of $20,000.
Their goal is to legitimize Bitcoin, and so far it seems to be working. Bitcoin is already mainstream, and that is unlikely to change anytime soon.
When considering a bet on the digital currency space, it is important to consider both the risk and the potential benefits. On September 6, 2018, a bitcoin was valued at $6,803, more than 120 times higher than the world’s largest gold ETF, which is worth $1,233.
Divide the two assets by their respective risks. The reward component is the result of the historic pay-risk-reward triangle of bitcoin and gold bases, known as the high-risk and high-reward quadrant.
Bitcoin and gold are very different investments. Bitcoin offers many characteristics associated with traditional assets: scarcity, long-term value, well-established physical properties, and usefulness. However, the value of Bitcoins remains highly speculative.
“Bitcoin is still too volatile to be used as money.”
The huge price volatility associated with this volatile asset makes it a poor store of value in an era of rising interest rates, potential reflation of the US economy, and an expected global economic recovery. It is true that gold can be accepted as a means of exchange, but unless you step into a time machine and find gold coins, lumps of gold, gold dust bags in your purse, vest pocket, gold chain or pocket watch and find traders who accept it as a means of payment, it is useless as a currency. But bitcoin is still too volatile to be used as money.
Gold is perceived as a stable store of wealth, and people are confident that it will serve them well in turbulent times. The use of Bitcoins as an actual currency for purchases is only just beginning, and the growth potential of this technology is astronomical.
Bitcoin and gold are real havens from the fiasco of the weakening fiat currency unfolding in the COVID world and the post-pandemic world, a world in which governments are looking for more revenue and ways to strengthen their control over central bank balance sheets. The latter is the most important point here. Bitcoin is unique among cryptocurrencies in that it has a large, finite reach and no influence from government agencies. None of this is going down the drain, which means that there will be strong demand for the perception of stable, traditional financial markets and diversification into uncorrelated assets that are not tied to a single Fiat currency. Gold fits now, and Bitcoin will fit in the future.
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