Gold is one of the most valuable metals, and it is the only currency that has enjoyed praises in both ancient and modern history. From the time of Pharaohs till the time of Donald Trump, and maybe till the time that you are reading this piece, having gold is almost equal to having some form of power.
When there is a war between countries, the paper money of the losing sides suffers a lot of damage, hence, it becomes worthless almost as soon as the war started. However, the only way they can buy goods and pay for services is through gold currency. It is a store of value. The question now is this; with the arrival of a decentralized currency like Bitcoin, is gold going to keep up with its characteristic of being a store of value? After reading this piece, only you can tell.
When investors predict that all chips will be down when the greed index of the stock market gets to 95 percent, the market is extremely bullish, and the only thing that makes sense to investors is a possibility of correction or massive fall. Everyone begins to remember that gold is a safe haven, they don’t trust the government enough to store value in paper money, and they understand that since President Nixon successfully unpegged dollars from gold, it is better to move money from the stock market to gold in difficult times. Contrary to what most people want to believe, gold does not gain significant value every year- a critical look at gold price history will reveal that it gains value gradually.
It takes a decade to see gold prices increase by 100 percent. The only time gold experiences a sharp price increase is when there is uncertainty in the global economy or other financial markets are experiencing corrections. If this is the reality of gold, why are people keeping it? Why does it qualify as safe haven? People are buying gold because it is legal in their country, it is scarce, and it is liquid and valuable.
Now let’s take a look at another competing safe-haven asset like Bitcoin, in fact, it is hard to ignore this digital asset because of its performance in the last 11 years of its existence.
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If Bitcoin Have Decent Level of Transparency, Is It Legal and Safe?
Bitcoin was created by an anonymous human called Satoshi Nakamoto, and it was designed to be a deflationary currency issued through an open and distributed ledger known as a blockchain. It is money that was created by codes and it is believed that every transaction that is done with it is recorded on millions of other computers around the world. Only 21 million of this asset can ever exist, and it is mined by miners who get bitcoin as a reward for validating transactions and securing the blockchain, they are paid for their computing power, energy used, and time. It will take more than 100 years to mine the last Bitcoin because its blockchain has been programmed to reduce mining rewards by halving at various block heights.
Due to the fact that it is difficult to hack the entire blockchain, it is safe. But there is an inherent fear that people could lose their money to hackers, an example is the Mt Gox hack, and money that was lost is yet to be recovered. History of gold is not free of thefts that are worth more than $6 billion in today’s value. All these events taught people how to securely keep their assets.
The legality of Bitcoin is controversial as only a few countries recognize it as a store of value, others are still trying to figure out how to regulate it. Nevertheless, employees are receiving their wages in Bitcoin, and more people are using it for cross-border transactions.
How Scarce Is Bitcoin Compared to Gold?
The supply of Bitcoin is capped at 21 million, there are 18.6 million bitcoins currently in circulation, and part of it is probably lost forever as it cannot be traced to anyone. This further reduces the amount that can be traded even when all bitcoins are mined. The government does not have the power to mine bitcoin at will, and the probability of having that power in the future is almost zero, this asset represents freedom to some investors and this is one of the reasons why it is considered as a safety net.
On the other hand, gold has a limited supply, but no one can accurately predict a time when all gold will be mined on earth. The government does not have the power to create new gold, it can only be mined, and only 3,300 tonnes of gold are mined every year. For this reason, it is rare.
What Is The Baseline Value Between These Safety Nets?
Since the days of Adam Smith, gold has several utilities ranging from being used as a medium of exchange to the production of pieces of jewelry, in modern days, it is used in the production of electronics and it offers value to dentists. Every year, researchers are discovering more utilities for gold. Bitcoin offers an unprecedented opportunity to bank the unbanked, as everyone can now save money by themselves and become their own bank by using secured bitcoin wallets. By using bitcoin for international transactions, it is fast becoming one of the global currencies, except that it is safe from government control, which is part of the reasons for its global adoption. Sending money with Bitcoin is cheaper than using traditional means, its true potential is yet to be fully explored as a lot of innovations are coming up.
What about Liquidity?
Bitcoin and gold have $230 billion and $9 trillion market capitalization respectively, this means that you can easily exchange either of them for paper money and other assets. The fact that bitcoin has low market capitalization shows its potential to increase in value in the future, with similar market capitalization with gold, it may become the most valuable asset in world history.
Bitcoin value increased sharply during the cryptocurrency market boom of 2017/2018, it enjoyed a lot of attention from retail investors and it got to an all-time-high value of $20,000 in 2018. Between this period and 2020, its value fell as low as $3,800 and it is currently valued at $19,000 per coin. This volatility is the major concern of investors who want to use it as safe-haven assets. Gold performed better during this period. When other financial markets are going down, and gold value is relatively stable, it offers protection to investors who are using it as a safety net to protect their money, it gives a better hedge.
To wrap it up
Bitcoin at $19,000 a coin means that new bitcoin valued at $5.58 billion got into the market after 2020 halving, this was easily mopped up by new demand to maintain its prices. Compared to gold, this annual supply is a tiny fraction of the annual gold supply. The existing $230 billion and an annual supply of $5.58 billion is too small to be absorbed by the world economy. Should the demand for safe-haven assets spike, bitcoin value will increase tremendously and it will do so faster than gold.
As an investor, you have to determine if bitcoin is vaporware that is designed to fail or it is another safe-haven asset with lots of potentials. It is obvious that bitcoin is a better safety net, but the choice is yours.