How Is Bitcoin Different From Gold?
Bitcoin, gold, and the roles they play.
It’s not bitcoin versus gold.
Bitcoin and gold are different.
Gold has properties that bitcoin does not and vice versa. There are also similarities between bitcoin and gold.
Market Cap Matters
Before we dig into the differences between bitcoin and gold, let’s talk about why these distinctions matter in the first place.
It starts with the significance of either bitcoin or gold’s current market capitalization. As of writing, bitcoin and gold’s respective (estimated) market caps are as follows.
- Bitcoin’s Market Cap — $340 billion
- Gold’s Market Cap — $9 trillion
Gold Is Dominant in Terms of Market Cap
Gold is the clear winner in terms of market cap.
Bitcoin still has a long way to go in order to reach a $9 trillion market cap valuation. That does not mean, however, that bitcoin isn’t trending in that direction.
Bitcoin has made inroads, seeing huge percentage gains in total market cap throughout 2020.
New all time highs, more bitcoin in existence, and increased mainstream adoption are pushing bitcoin’s market cap higher.
Hong Fang, the CEO of OKCoin, believes that bitcoin can rise to 20%-25% of gold’s market cap within a year’s time. This would give us a bitcoin price range between $80,000–110,000.
Bitcoin and Gold Liquidity
How liquid is bitcoin?
Does it trump gold in terms of liquidity?
These are questions that require more nuanced answers.
In theory, bitcoin is an extremely liquid asset.
In practice, bitcoin also demonstrates impressive liquidity.
Because bitcoin is a digital asset, its core protocols make it primed to be versatile and liquid.
Bitcoin is tradable. There are an increasing number of cryptocurrency exchanges and other means of buying or selling bitcoin. People are also able to convert it to cash with relative ease.
Gold’s market cap makes it very liquid.
Gold is arguably more liquid than gold due to the size of its market cap.
If we are strictly referring to one’s ability to quickly acquire or sell the asset, then bitcoin is more liquid. The process can be done much quicker when it comes to buying, selling, or sending some bitcoin. It’s digital.
With gold though, the market itself is more liquid simply because it is a larger market.
If speed to complete a transaction is not taken into account, then gold is still dominant in terms of liquidity.
Bitcoin outperforms gold when speed to complete a transaction is taken into account. It’s difficult for any physical asset to compete with bitcoin and other cryptocurrencies in terms of being borderless and more or less instantly transferable.
Gold Is Scarce
Gold is a scarce asset. It is hard to find but it is extremely plentiful.
There is not a finite amount of gold, to our knowledge at least.
Gold’s large market cap is also evidence of just how plentiful the gold market is.
According to Forbes, there is roughly twice as much above ground gold today than there was when we left the gold standard.
Bitcoin Scarcity Is Groundbreaking
Bitcoin takes scarcity to a new level.
Bitcoin is more scarce than gold. The fixed and limited supply of bitcoins that can ever exist is what makes its scarcity groundbreaking.
Because there is a fixed amount and because bitcoin is digital, every single bitcoin can be accounted for.
As a scarce asset, the principals of supply and demand should drive bitcoin’s price and market cap higher, at a faster rate than gold, so long as demand sentiment continues to grow.
Gold Is Low Tech
Gold performs the characteristics of sound money at least sufficiently. It has a proven tack record of effectively serving its purpose.
Gold has meaningful elements scarcity, divisibility, utility, durability, and transferability. It is, however, low tech compared to bitcoin and cryptocurrencies and even compared to fiat currency.
Bitcoin Is New Tech
Bitcoin is to digital as gold is to analog.
Even though gold has all the elements of sound money, bitcoin is a new evolution upon the idea.
Bitcoin is truly scarce and finite.
Bitcoin is extremely divisible, down to the one hundred millionth of a unit. Bitcoin in and of itself has intrinsic utility.
The tech is what gives the entire concept behind bitcoin value. Bitcoin in and of itself has intrinsic utility.
Bitcoin is durable in that once it has been created, it can never be undone. Another side note is that bitcoin cannot be counterfeited.
Bitcoin is also highly transferable. As we discussed earlier, gold is very liquid due to the size of its market cap but bitcoin outperforms it when it comes to being borderless and if the transfer is time sensitive.
Institutional Support for Bitcoin and Gold
One might think that gold has vastly more institutional support than bitcoin. In some ways, this is true. In other ways though, neither bitcoin nor gold have a lot of institutional support.
Both bitcoin and gold are hedges.
Both bitcoin and gold are used as hedges against traditional fiat currency and inflation. They are considered by many as safe haven assets.
Bitcoin is making waves in 2020 by gaining new, critical retail and institutional support.
According to Dan Tapiero, gold still only has about a 2% share of institutional support. This means that no institutions are putting more than 2%, on average, into gold whether it be as a hedge or otherwise.
Gold, like bitcoin, has different narratives that drive it at different times. — Dan Tapiero
Both bitcoin and gold can gain institutional ground.
The opportunities are seemingly endless for both bitcoin and gold when it comes to gaining a larger share of institutional support.
The big question is — will institutions skip over gold when looking for a hedge and move straight to bitcoin?
Can Gold Be Digitized?
Bitcoin’s advantage to gold comes in its being digital.
Can gold, however, be digitized in some way through the blockchain?
It’s possible that gold, and ultimately any market-based asset, will be digitized in some way down the line.
It’s also possible that gold retains some advantage down the line for not being digital.
Years from now when everything is digitized and further commoditized, gold may be at a premium for remaining physical and in turn more anonymous.
Future Market Cap and Price
Bitcoin and gold have seen increases in value this past year.
Most would say that bitcoin can move higher and quicker in both the short and long term. Bitcoin likely will outperform gold as an investment.
Even if bitcoin outperforms gold though, that doesn’t mean that gold is going away. Both could continue to work as parallel stores of value for different reasons in the future.
Bitcoin’s emergence has put more eyes on gold.
The irony of debating bitcoin versus gold is that a lot of bitcoiners and gold bugs are similar in terms of mindset and approach to their respective assets. We’ve also seen a large number of newcomers to gold via bitcoin.
The differences between bitcoin and gold remain. Mainly, these differences are in the digital or physical makeup of either and we’ll continue to watch how both bitcoin and gold evolve in an ever-changing world.
US Dollar Dominance
No matter your take on bitcoin or gold, the reality is that the US dollar remains entrenched as the world’s reserve currency.
Bitcoin does have qualities that would make it a strong currency. Satoshi Nakamoto set out to establish bitcoin as a peer to peer, borderless currency based fundamentally on trust.
Gold also has qualities that are in line with currency but neither bitcoin nor gold are replacing the US dollar as the world reserve currency anytime soon.
Bitcoin is being used as a currency within nation states that have extremely volatile national currencies. Bitcoin, like gold, is proving more useful as a store of value rather than currency at the given moment.
2020 has revealed both the flaws of central bank currencies and the resilience of it. Despite seemingly infinite money printing and quantitative easing, the US dollar is far from being replaced by anything else.
Bitcoin and gold are on their own paths.
It is not a debate of bitcoin versus gold or either versus the US dollar. It is instead more a matter of — how do each of these fit into an evolving, global ecosystem?
We are already experiencing a co-existence of bitcoin, gold, and all other stores of value and fiat currencies.
Bitcoin is uniquely positioned to serve a purpose that neither gold nor fiat currencies have up until this point.
Bitcoin addresses previously unaddressed questions of double-spend, counterfeiting, and fixed versus scarce versus infinite supply.
We will soon see central bank digital currencies, taking useful elements from bitcoin and cryptocurrencies.
We will also see gold either move in a more digital direction or one in which it becomes a premium, sought after physical asset.
We are in just the early stages of the story of bitcoin, gold, and their impact on fiat currency.
Thanks for reading! I am not an investment or financial advisor. This is not financial advice. All opinions expressed are mine alone. If you want more content like this, sign up for my weekly email.