Bitcoin as an Alternative to Gold
Bitcoin is proving to be an alternative to gold; they are both finite resources, you must spend money to obtain both resources (gold mining vs. bitcoin mining), both are considered safe-haven assets, and both are a hedge against inflation. However, there are several advantages that an investment in bitcoin provides you with that an investment in gold does not. Bitcoin is highly divisible and easier to divide than gold, it is more liquid than gold, and BTC is more portable than gold. These are just a few of the reasons investors are calling bitcoin, ‘gold 2.0’, let’s take a closer look to see why bitcoin serves as an alternative to gold.
The similarities
Bitcoin has many similarities to gold. When you consider these similarities, there becomes a strong case that bitcoin can serve as an alternative to gold. As this digital asset continues to mature, it has even gotten to the point where prestigious institutions from the banking and finance industry can no longer ignore bitcoin and the role it has begun to play as an alternative to gold.
On July 11, Fed Chairman Jerome Powell acknowledged that bitcoin is being used as an alternative to gold. And in a 2018 report from the St. Louis Federal Reserve Bank titled “A Short Introduction to the World of Cryptocurrencies,” the St. Louis fed said that “bitcoin itself could over time assume a similar role as gold.” Let’s take a closer look at the similarities between bitcoin and gold to see why prestigious members from the banking and finance industry are saying this about BTC.
Limited Supply:
When a commodity has a limited supply, as the demand for the commodity increases, the price will increase as well to reflect the increased demand but constant supply.
There will never be more than 21,000,000 million bitcoin. And the supply of gold is limited to the amount of gold that is on this earth. As demand for each of these assets increases, yet, the supply remains the same, their prices increase.
Spending Money to Extract the Asset:
The production of both bitcoin and gold require resource allocation. The initial investment in equipment and machinery that is needed to produce each resource is factored into the price. Similarly, the production/extraction of bitcoin and gold are both called mining.
In bitcoin, miners are individuals who invest in computer hardware as well as pay an electricity expense to power their hardware that is capable of minting new bitcoins into circulation.
In the case of gold, miners are individuals who invest in equipment designed to remove gold from the earth.
In each instance — both gold and bitcoin mining — the number of resources required, the cost of those resources, and the amount of labor the miners do, is not overlooked. Although these things are not explicitly factored into the price, a miner would not sell the resources they extract unless they believe they are getting a fair or adequate value considering their initial investment of resources and labor that was required.
Safe-Haven Asset:
Both bitcoin and gold are considered safe-haven assets: an asset that retains or increases its value in times of market turbulence. In times of geopolitical uncertainty or economic unrest, investing in a safe-haven asset like bitcoin or gold has given its investors a way to escape the turmoil.
For instance, consider Venezuela, where annual inflation was over 1,000,000% in 2018, if a Venezuelan invested in bitcoin or gold, then they could have easily escaped the economic instability that persisted in their country and preserved their wealth better than they could have if it were kept it in Venezuelan bolivars.
In addition, safe-haven assets like bitcoin and gold tend to be uncorrelated or have negative correlations to the movements in the equities markets, which lessens the impact or acts as a hedge against movements in equities markets.
Hedge Against Inflation:
And the last similarity that we will be covering is that both bitcoin and gold serve as a hedge against inflation. As a result of inflation, fiat currency becomes weaker, and it will generally take more units of fiat currency than it did in the past to buy a good or service. In other words, the prices of goods and services rise as a result of inflation. But since both bitcoin and gold are priced in fiat currency, when inflation occurs, the value of both bitcoin and gold tend to increase and become more valuable/expensive.
Bitcoins Advantages Over Gold
In addition to the features that bitcoin and gold have in common, bitcoin has a unique set of features that gold does not have, which could make it a more attractive investment than gold. Bitcoin is easily and highly divisible, more liquid than gold, and more portable than gold is.
Divisibility:
Unlike gold, bitcoin can easily be divided. Bitcoin can be bought, sold, and spent down to eight decimal places — which is referred to as “a satoshi” ( a satoshi is = to 0.00000001 or 1.0 * 10–8). Because bitcoin is highly divisible, it is much easier to buy as well as sell; this is because you can buy and sell fractions of a bitcoin instead of buying (or selling) an entire bitcoin, something that a retail investor may find unaffordable or too expensive.
Liquidity:
It is easier to buy and sell bitcoin than it is to buy and sell gold. To buy bitcoin, all you need is an electronic device that connects to the internet like a phone or computer. Afterward, you can buy bitcoin from a cryptocurrency exchange or a crypto-brokerage and have your bitcoin sent directly to your electronic device.
To buy gold, you can also use an exchange or brokerage, however, the gold will need to be transported to you afterward. In addition, when it is time to sell, you will have to transport your gold to the buyer, which will cost you money as well. The fact that gold needs to be transported to the buyer from the seller adds a step to the buying and selling process that makes it complicated to liquidate the asset.
Portability:
You want your store-of-value — anything that retains purchasing power into the future — to be portable. This is because if you ever need to extract the purchasing power from the store-of-value, you’ll find it beneficial if you can do this anywhere at any time.
As long as you have an electronic device, you will be able to access your bitcoin or carry it with you; unlike gold, which is relatively heavy and difficult to transport in significant quantities. Depending on how much gold you own, you may even need a truck or other machinery to transport it from location A to location B!
Bitcoin as an Alternative to Gold: What Does This Mean?
Due to the features that bitcoin and gold have in common with each other, and the additional benefits that bitcoin provides its investors that gold does not, bitcoin can be used as an alternative to gold and is often referred to as gold 2.0.
It is estimated that gold has been around and in use since 700 B.C, bitcoin has only been around and in use since January 2009. In 2017, gold had an estimated market cap of 7 trillion, and at the time of writing (July 15, 2019) bitcoin has a market cap of 188,396,670,412. Given those statistics and considering the similarities between bitcoin and gold, it is possible that bitcoin’s market cap will eventually reach the trillions, as more investors allocate a percentage of their wealth to bitcoin for the same reasons that they might invest in the multi-trillion-dollar gold market.
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