If you had to make a purchase for 10 thousand zlotys, without the possibility of diversifying funds, would you buy gold or Bitcoin? What if the amount was a million zlotys, and you will not regain access to the purchased asset until 20 years later? There is definitely no clear answer to the question in the title of the topic, whether Bitcoin or gold is better. Both the most famous precious metal and the most famous cryptocurrency have their advantages and disadvantages.
As the saying goes, your point of view depends on your point of sitting. There will certainly be fans of both gold and Bitcoin, which is often called digital gold, among the readers. It all depends on our risk aversion, investment horizon and what we actually want to do with a given asset. So instead of deciding unequivocally which is better, let’s take a closer look at both assets and compare them. Let’s see what they have in common. What is gold better at and what is Bitcoin better at?
What was before gold?
Money in various forms has accompanied people in everyday life practically from the very beginning. Over hundreds of years, it has taken on various forms, depending on what people currently use. Its original form was barter, in which one good was directly exchanged for another in proportion to its value. This trade, as we can imagine, was difficult from a logistical point of view. People realized that something else had to be used, invented specifically for the purposes of exchange.
Until modern times, bullion money was used in trade – base metals such as copper or iron. Bullion money was more durable than ordinary goods and was easier to transport, but its production in the form of coins was expensive and often (especially in the Middle Ages) the coins were spoiled, called renovatio, by the rulers. This consisted of withdrawing current money from circulation, re-melting it into smaller and worse finenesses and introducing it into circulation, without changing the face value. Thanks to this, the ruler had a steady source of income, but ultimately it led to the depreciation of a given coin. It was no different with gold.
Gold as a relic of the past and hope for difficult times
As we all know, gold has been synonymous with wealth for thousands of years and has significant advantages over Bitcoin in many ways. It is at the top of the precious metals pyramid.
The history of this precious metal dates back at least a few thousand years. Although gold was primarily used as currency, many ancient civilizations used the gold ore to create jewelry, ornaments, and medical equipment. It was first used as currency by the Turks around 600 BC. This practice continued for many centuries and ended in the mid-19th century, when many countries began to abandon the actual use of gold currency in favor of a system called the “gold standard” and paper money. This was the next stage in the destruction of money and it underwent some changes over the years.
The Gold Standard and Its Abandonment
Until World War I, the Gold Standard system was famous, the main principle of which was that paper money had to be covered by gold. Unfortunately, the war and the subsequent crisis destroyed the entire financial system in the world. It was not until July 1, 1944 that the Bretton Woods Conference changed everything. A decision was made that the exchange rates of all currencies whose countries joined the new system were to have a specific parity in gold or the dollar. Additionally, each change in this value by more than 10 percent had to be approved by a new institution – the International Monetary Fund. This system came to an end at the turn of the 1970s and 1980s, when the United States stopped exchanging its currency for gold due to the growing debts of this country (they were unable to cover the issued dollars with gold).
The current fiat money system is based on the fact that it is created by banks. Cash money (banknotes and coins) is issued by the central bank of a given country, and commercial banks create non-cash money. Today, gold serves, among other things, as an investment asset that allows investors to make profits thanks to market fluctuations.
Additionally, millions of people around the world believe that it is a symbol of wealth and that having it reflects high social status. Many of us would feel more secure (materially) if we had a gold bar hidden somewhere, waiting for a “rainy day”, and gold jewelry is also a highly desired item.
At first glance, Bitcoin is similar to gold, but it has many differences.
Even though Bitcoin is a novelty compared to gold, it is often called digital gold.
The analogy of Bitcoin miners is quite well-known and was created because the process of “creating” or “mining” Bitcoins is compared to the same activity of mining physical gold.
Digital miners, however, should not be identified with people who sit in a mine and work with pickaxes. A more appropriate example would be to try to imagine them as accountants whose task is to confirm and record transactions in a distributed chain of data called a blockchain.
Gold and Bitcoin currently have a limited supply, and that’s not expected to change anytime soon. They are finite commodities. Current estimates suggest that around 190,000 tons of gold have been mined to date, with around ⅔ of that mined in the last 70 years. As an interesting aside, all of that gold would fit into a 21-meter cube.
What does the future hold?
About 2,500 to 3,000 tons of gold are mined each year, and the supply is expected to continue. It is currently difficult to estimate how much gold is actually underground and how much can be mined. Gold has a finite amount. Of course, it can increase as people discover new deposits. The price increase will certainly contribute to more expensive investments in mining, but it cannot continue indefinitely.
Bitcoin has a strictly limited supply, which is controlled by algorithms and mathematics. At first, the reward for each newly discovered block was 50 BTC, and every four years this number decreases by 50%. In 2020, miners will mine about 87.5% of all coins, and the target value of 21 million will be reached in 2140. As the block reward decreases, miners will eventually live off the commission paid from each transaction on the network.
Both the cost and difficulty of mining both assets are constantly changing. However, Bitcoin has a significant advantage over gold in several aspects. As long as there is no global blackout and we have access to electricity and the Internet, cryptocurrencies will survive. First of all, because it is very difficult to imagine paying in everyday life with gold. Let’s imagine that we want to pay for bread with a gold bar – it is completely impractical. We cannot even easily divide a gold coin into smaller parts to pay for dinner at a restaurant.
Bitcoin, on the other hand, is divisible, which would make it a great means of payment… if not for its constant price fluctuations. Despite this, it finds its enthusiasts. Many people would be happy to pay with bitcoins in everyday life. Assuming that the value of Bitcoin will increase over time due to the decreasing supply, it can be considered a deflationary currency. Each lost wallet causes a decrease in the number of coins in circulation. We are also sure that as the years go by, the market will not be flooded with new coins. The supply is very easy to predict, because it is determined by the algorithm.
Which is better for a crisis – Bitcoin or gold?
Gold is definitely an asset that stores value over time, especially if we take decades as the time horizon. We can’t say the same about Bitcoin yet – it has definitely conquered the current decade, but its future is still uncertain.
Gold has a history that goes back hundreds, if not thousands, of years when it comes to preserving value over time. Bitcoin should still be considered an experiment at this point. Only when it becomes embedded in the financial system will it be possible to say unequivocally whether it is better than gold. Whether it will be the current system or a completely new one – time will tell.
There are already opinions that Bitcoin and gold will become the foundation of the new monetary system.
There are a number of factors behind this acceptance of Bitcoin into the financial world. This also means, fortunately or unfortunately, a number of regulations and also the acceptance of Bitcoin as a full-fledged means of payment. However, there is nothing to prevent both of these assets from existing in parallel – one in the physical world and the other in the digital world. As we all know, good diversification is the basis.
What is the result of the Bitcoin vs Gold clash?
In summary, Bitcoin and gold have many similarities, but their differences are also significant. Until we decide what exactly we want to compare, we cannot say unequivocally which is better. As a payment method in the current digital world, Bitcoin is definitely the better option. Despite this advantage over gold, product prices are still converted to fiat currencies. This does not change the fact that in the future it may be easier to buy something quickly with Bitcoins than with gold coins.
The most famous cryptocurrency is primarily speculative. Frequent price changes certainly allow you to earn more on trading, but it is also easier to lose funds. When trading Bitcoin, you definitely need to adopt a different investment strategy. You have to remember that because it is traded 24 hours a day, anything can happen. Each investor must decide for themselves what is better to invest their capital in, based on a risk-to-reward calculation.
Bitcoin has a higher price volatility compared to gold. For this reason, the physical precious metal is considered a safe haven in times of crisis. The way of storing both assets is diametrically different, and for this reason it is impossible to say which is better. Whether it is better to own physical gold or digital bitcoins depends on many factors. The best solution in such a case is to diversify and own both goods. Bitcoin and gold do not have to be mutually exclusive, on the contrary – they can complement each other.
So, do you have your bitcoins yet?
Although there are already hundreds of cryptocurrency exchanges around the world, the industry is just gaining momentum in Poland. The Polish Financial Supervision Authority has set the bar very high and many Polish exchanges have moved to foreign jurisdictions.
One of the KNF-licensed cryptocurrency exchanges is Coinquista, which is currently issuing its own cryptocurrency. On the exchange, we can buy the most popular digital assets, such as Bitcoin. Additionally, the exchange is currently selling its own token – CQX. They can currently be purchased on the platform on preferential terms until the end of November at https://coinquista.com/.
