In March 2017, for the first time ever, one Bitcoin traded for the same price as one ounce of gold. This fueled a surge in the bitcoin-vs.-gold conversation—a common, logical, but ultimately misplaced comparison. The fact is Bitcoin (like all digital currencies, or “cryptocurrencies”) plays a unique role in the finance space; it is not a substitute for or competitor to precious metals.
Why People Compare Gold and Bitcoin
The hard money crowd does what it can to protect itself from fiat currencies (such as the Fed-manipulated U.S. dollar). Students of history understand the risks of giving self-interested bureaucrats or politicians the ability to control the medium of exchange; look no farther than the Weimar Republic or Zimbabwe.
For thousands of years, gold and silver were the hard money standard. They still are, even though every major country now operates exclusively on paper money. Once governments dropped gold, concerned investors and savers looked elsewhere.
The modern age gave birth to digital currency. The idea is simple: a decentralized system (i.e. no central bank or single authority with power over supply) that doesn’t require the same physical storage and protection of metals.
Bitcoin (and other digital currencies) possess many qualities that hard-money enthusiasts find attractive:
- Limited, consistent supply
- Can be used tactically in a portfolio to increase diversification and guard against inflation
- Difficult to tax
However, complications exist in the digital delivery that make Bitcoin a less-than perfect substitute.
Problems with Digital Money
The cryptocurrency space attracts some shady activity. Authorities struggle tracking transactions in Bitcoin, which means that criminals can use it whenever direct cash transfers seem too risky. Hackers and online scammers try to break into the blockchain to abuse or steal from people—and some succeed.
Bitcoin also faces huge political risk. Governments don’t like anyone (criminals or taxpayers) avoiding their control, and there is growing momentum in Washington to put restrictions on digital currency use. Because Bitcoins are not physical items, they can’t be stored safely or off of the cloud, so to speak.
Gold vs. Bitcoin Is Not About Price, Investing Returns
The value of bitcoin saw astronomical growth between 2010 and 2017. In fact, you’d be hard-pressed to find any asset that appreciated as much as Bitcoin in so short a timespan. It wasn’t all smooth sailing, though (as the chart below shows). Bitcoin suffered a huge hacking disaster and Bitcoin holders lost more than $400 million.
Gold saw impressive growth during the same stretch (though not nearly as much, and mostly concentrated around 2011-2013).
But those are just distractions. The real story between gold and Bitcoin is utility, not price or investing returns.
Gold is the ultimate survivor. It has always been valuable and always will be. If the dollar collapsed or the banking system failed, gold could be there to facilitate trade and store wealth. It is primarily a defensive commodity and its function is close to that of insurance.
Bitcoin, by comparison, is much more aggressive and flexible. It’s easier to actually use Bitcoin to complete transactions (legally and practically). It has a very defined speculative quality. And there is no reason that Bitcoin should be valuable forever. Bitcoins have no inherent value or functional operative use. Gold is valued for its beauty and its metallic properties. Bitcoin only serves a digital function.
Adding Gold Bullion to Preserve Wealth and Hedge Against Risk.
Gold remains the most popular precious metal for commodity investing, both in the United States and internationally. Since many gold bars and coins qualify for Self-Directed IRA inclusion, investors can protect their portfolio while staving off the IRS, too.