The Difference Between Gold and Bitcoin

Many market observers have compared gold and bitcoin.^[1] Both of these have proved helpful to investors, and both have been harnessed as a speculative investment at some points and a safe-haven asset at others.

While some analysts have compared these two, bitcoin and gold have important differences. These range from something as simple as tenure to the very nature of these assets themselves: gold is tangible, but bitcoin is a digital creation.

Investors who are thinking about trading either of these can benefit significantly from comparing and contrasting the two.

Gold: The Basics

Gold has been used as a form of currency for more than 2,000 years.^[2] The supply of gold—as in, what we can access—increases when miners retrieve the precious metal from the ground.

Once it has been mined in this way, gold can be used in goods like jewelry. Additionally, investors can purchase the precious metal in many forms. They can buy bullion, or they can gain exposure to its price movements through a wide range of financial instruments such as exchange-traded funds and gold futures.

Gold has frequently generated significant attention as a safe-haven asset. The precious metal rose to an all-time high of more than £1,400 in late 2011, reaching these levels as debt issues brewed in both the United States and Europe.^[3]

Bitcoin: The Basics

Bitcoin is a digital currency. Like gold, it is also created by mining, but the process is entirely electronic. Basically, bitcoin miners verify transactions and combine those transactions into blocks, which in turn make up the digital currency's blockchain.

Every time miners succeed in completing a block, new bitcoins are released. Under the bitcoin protocol, these new bitcoins are created roughly every 10 minutes. People can use these units of digital currency to make transactions. They can also use the units to invest.

Key Differences

One of the most striking differences between gold and bitcoin is that while the precious metal represents a physical object, bitcoin is entirely digital.

Past that, both the current and maximum supply of bitcoin are known entities. More specifically, the bitcoin protocol caps the total number of these digital currencies at 21 million, and interested parties can find out how many of these bitcoins have been mined by looking online.

More than 16.6 million bitcoins had been mined as of October 2017,^[4] with the remainder not expected to be mined for many years.

When it comes to gold, no one knows how much of the precious metal is left on the planet. Miners can find gold under the surface of the earth, and it also exists in seawater. Some companies have even started working toward creating a space mining industry, which could gather precious metals from space.^[5]

Gold has a far greater tenure than bitcoin, as it was first used more than 2,000 years ago.^[2] Bitcoin, on the other hand, has been in existence since the first block was mined in January 2009.

Another key difference between the two is that while gold is a commodity, classifying bitcoin has proven a bit more elusive. A whitepaper produced by investment manager ARK Invest and exchange operator Coinbase made the case that bitcoin belongs to its own asset class, pointing to several variables such as the low correlation between bitcoin and other asset classes.^[6]

Key Similarities

Gold and bitcoin have both been identified as safe-haven assets. While gold has long been identified in this way, bitcoin has more recently become something that investors flock to in times of distress.^[7]

Bitcoin and gold are also both speculative investments. Unlike stocks and bonds, they are not based on factors like earnings and interest payments. As for what drives their price movements, the answer is complicated, and not everyone agrees. For example, gold has acted as a safe-haven asset in many cases but risen alongside riskier assets at other times.

In 2013, Federal Reserve Chairman Ben Bernanke told Congress that he was not sure what gold's price determinants really were.^[8] "No one really understands gold prices," he said.

As for bitcoin, market observers have provided various ways of valuing the digital currency. Thomas Lee, managing partner and head of research for Fundstrat Global Advisors, stated on 18 October 2017 that bitcoin would reach US$6,000 by the end of the following year.^[9] He based his forecast on the key role of usage, stating that as the number of bitcoin users grows, the digital currency's value will increase rapidly.

Interestingly enough, his prediction came true, and bitcoin surpassed US$6,000 on 20 October 2017.^[4]

Dan Davies, a senior research adviser for Frontline Analysts, asserted that transaction volume drives bitcoin's value. "It's not a security with some intrinsic value, rather it's a currency that in the long term is governed by an exchange rate driven by trade or volume of transactions," he said.^[10]

Summary

Gold and bitcoin are both investments that have drawn significant attention as safe-haven assets. They have some important differences, such as gold being a physical commodity and bitcoin being purely electronic.

However, the two also have similarities. They are both speculative investments, in that their prices are not based on more basic fundamentals like revenue, earnings or interest payments.

Before purchasing or speculating on either gold or bitcoin, investors can benefit significantly from conducting thorough due diligence. Plus, they should keep in mind that risk is inherent to investment, so they shouldn't invest any money they cannot afford to lose.