Bitcoin vs. Gold

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Disclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.

If you have spent any amount of time around Bitcoin investors, you have probably heard Bitcoin being compared to gold. Many even call it “digital gold” because of its similar use cases to the precious metal. Bitcoin can’t be used to build electronics or molded into jewelry, but it’s quickly becoming a popular store of value asset.

This being said, many people likely wouldn’t buy Bitcoin for the exact same reasons as gold. If you are looking for a strong hedge against inflation with a high chance of significant returns, Bitcoin is arguably the better option. If you just want to hold a safe asset that will almost certainly hold decent value for decades if not centuries, gold is probably better. Neither investment asset is exactly superior because they each have their own unique use cases, even though they fall into a similar class of assets.

What Is Bitcoin?

Bitcoin is a decentralized peer-to-peer digital currency free from the tight control of centralized financial institutions. It was the first major cryptocurrency and has been the largest since its inception. In the midst of the 2008 financial crisis, an anonymous visionary with the pseudonym Satoshi Nakamoto released the Bitcoin whitepaper. In it, he describes a new kind of currency that isn’t beholden to financial intermediaries. He notes that the trust-based model we use for most commerce and finance works most of the time, but when it fails, it fails severely. Nakamoto believed that Bitcoin was the solution. No one person or company can change Bitcoin without the support of more than 50% of the network.

The technology behind Bitcoin is simple. You can think of it as a ledger that is open and accessible to everyone. Every transaction is added to the public blockchain alongside its date, value, sender and receiver in batches called blocks. Anyone can submit a transaction to be processed, and if the majority of the network verifies it, it's added to the blockchain permanently. When a network participant, called a miner, adds a block, they are awarded some Bitcoin for their trouble. Over time the amount of Bitcoin awarded decreases until roughly the year 2140 when no more Bitcoin will be added into circulation. This process ensures that Bitcoin will always be a scarce asset. 

You may be wondering why Bitcoin has value if it's just a shared ledger, but the reasoning behind its value is not all that different from other kinds of money. Bitcoin users believe its technology and decentralization are worth something, so it is. It’s really that simple. Since the abolishment of the gold standard, the U.S. dollar has value because people believe that the government and individuals will accept it. 

Advantages of Bitcoin Over Gold

One of Bitcoin’s greatest features is its decentralization. It is not controlled by a central body or institution, and the power to change it is split between many thousands of people. However, Bitcoin is not quite as decentralized as many of its fanatical supporters boast. Only a few large companies make up a majority of the miners on the network, and if they team up they could change it. Nevertheless, that eventuality would still be difficult, so it is much more decentralized compared to fiat currencies. 

Bitcoin and gold are both popular hedges for inflation. Many people are rightly worried about their governments printing tons upon tons of fiat currency. Some economists strongly believe in the new heterodox “Modern Monetary Theory,” which states that large sovereign countries like the U.S. with full control over their currencies can support massive government spending on comparatively small revenue. Supporters of the theory often think that rapid inflation is unlikely to be caused by this kind of spending. However, this scenario is already happening in the U.S. and other countries around the world in similar situations. The inflation rate in the U.S. at the time of writing is about the same as it was in the midst of the 2008 crisis. 

Bitcoin could provide a safe haven against inflation and is debatably a better hedge against it than gold. Gold has been an incredibly successful inflation hedge only a few times in recent memory including the early 1980s and the 2000s. Bitcoin has traded in long market cycles for its entire existence, beating out inflation by a massive margin in every bull run. This past performance doesn’t mean that it always wins out year after year because cycles usually take longer than one year. It’s also possible that this pattern could change, and it never sees an enormous bull run again. Bitcoin is a new and unpredictable asset compared to gold, but it could still take over as the largest store of value asset in the future. 

Advantages of Gold Over Bitcoin

Both gold and Bitcoin are used mostly as stores of value. However, Bitcoin can be used for payments, and gold is a highly sought-after material in the electronics and jewelry industries. More than 90% of the world’s gold supply is held as a wealth store, either in the form of bullion or jewelry. It’s easy to fall into the trap of thinking that only tangible things can be valuable, and Bitcoin is a fantastic counter-example of this. 

Gold has the unique property of nearly constant demand over centuries. It has been valued highly for a long time. This feature has made it an incredibly safe long-term store of value, but it’s entirely possible that the demand will decrease in the future. A lack of volatility can also be somewhat negative. Until asteroid mining is commonplace, the price of gold likely won’t suffer a devastating crash like Bitcoin.

How Is Bitcoin Secured?

Even though Bitcoin is freely accessible to anyone with an internet connection, it's incredibly difficult to manipulate. All cryptocurrencies have a consensus mechanism built in to secure their networks. Bitcoin uses the first of these mechanisms ever invented called proof of work (PoW). In the 90s, PoW was derived independently by the creator of HashCash and crypto pioneer, Adam Back, and a team of cryptographers, Cynthia Dwork and Moni Naor. Essentially, PoW requires computers to do computational work like solving a mathematical puzzle to deter both frivolous and malicious uses of the network. Bitcoin miners use advanced hardware to solve these puzzles as fast as possible. 

Originally, PoW was used to combat email spam. Your computer would have to solve a quick puzzle to send every email, making it much more difficult to send out enormous amounts of spam. Bitcoin uses PoW to a similar but greater effect. A common strategy of cyberattacks is to either overload a network or take over a majority of the processing power on it. It would be incredibly difficult to take over a large PoW blockchain like Bitcoin because you would need an enormous amount of computational power all at once to solve all the complex puzzles. Unlike spam emails where you can send one by one, you need to control more than 50% of the Bitcoin network at once to make major changes. 

Many Bitcoin investors tout PoW as one of Bitcoin’s greatest features, and that may be true in some senses, but it’s also one of Bitcoin’s worst problems. If you have been following the cryptocurrency zeitgeist in 2021, you will have likely heard about the huge electricity consumption of Bitcoin. Some statistics say it uses 1% of the world’s electricity, a large portion of which is generated through burning fossil fuels. This problem is entirely due to Bitcoin’s PoW consensus mechanism because the complex hardware needed to solve the mathematical puzzles uses a lot of power. Industry leaders are pushing to move most Bitcoin mining to renewable energy sources, but it will take time. 

Gold Market Cap vs. Bitcoin Market Cap

Gold has the highest market capitalization out of all assets on the planet, tangible or digital. It towers over companies like Microsoft Corp. (NASDAQ: MSFT) and Apple.com Inc. (NASDAQ: AAPL) with an $11.4 trillion market cap. Bitcoin has an enormous market cap of around $1 trillion, but it just isn’t on the same scale as gold at the time of writing. At Bitcoin’s trillion dollar market capitalization, it would need to see a little more than a 10-fold increase (or 900% return) to beat out gold’s current market cap. For Bitcoin to hold the same market cap as gold, bitcoin would need to trade at $610,000 per coin. 

If Bitcoin continues at the same pace as it is now, however, it's possible it could flip gold. Historically, it has traded in somewhat predictable cycles, despite its short-term volatility. Every bull run has pushed Bitcoin up thousands of percent, so a 900% increase doesn’t seem all that unreasonable. It’s easy to extrapolate the last few bull runs to estimate what it could reach, but the sheer scale of $11 trillion also matters in this analysis. That is more than 10% of the entire world’s estimated GDP. Getting this amount of capital into one investment vehicle will require governments and institutions to adopt Bitcoin as a store of value asset.

Use Cases of Bitcoin vs. Gold

For the average person, Bitcoin and gold use cases are often quite similar. They are both considered strong inflation hedges by many and hold value well. However, one of the most important differences between them is price volatility. If your risk tolerance doesn’t permit your investment to drop 40% to 50% in a week or less, even if it will likely recover, then Bitcoin is probably not the best investment option for you. 

Physical gold also has the advantage of being a tangible and useful material for electronics and jewelry. It is so valuable in electronics because it is one of the best conductive materials and is more resistant to tarnish and corrosion than other precious metals. Gold’s distinct shine and malleability also make it a perfect material for jewelry, which can also act as a store of value. While these industries are certainly important, they aren’t the main use of gold by far.

Where to Buy Bitcoin

Because Bitcoin is the most popular cryptocurrency in the world, it is easier than you may think to purchase. All major crypto exchanges and even some brokerage applications offer Bitcoin trading. Some of the best trading platforms with Bitcoin are Coinbase Global Inc. (NASDAQ: COIN), Interactive Brokers, WeBull, Robinhood Markets Inc. (NASDAQ: HOOD), Gemini and Crypto.com. Before you can buy Bitcoin (BTC) on any of these platforms, you need to verify your identity. Generally, this process requires you to provide your address, Social Security number and a picture of a valid ID (like a driver’s license). Once you’re verified, most exchanges let you link your bank account and deposit fiat currency to trade with immediately. 

What Has More Room to Grow: Gold or Bitcoin?

Bitcoin and gold are both likely to grow significantly in the future. It’s difficult to tell which one will grow more than the other because there are solid arguments in favor of both assets. Scarcity drives the market price of gold and Bitcoin because, on the surface, it seems like there is only a limited amount of each available. 

It would take a tremendous amount of effort to add more Bitcoin or gold into circulation, but both are possible. Bitcoin has a hard-wired max token supply of 21 million, but with control over 50% of the network, that cap could feasibly be raised. At the time of writing, this process would cost at least billions of dollars and is likely a terrible idea, but it's possible. We are also not limited to only the gold that exists naturally on Earth. Asteroid mining could potentially be a nearly endless source of the metal, eliminating its scarcity. This is where Bitcoin may have the advantage. As technology develops, asteroid mining becomes easier and easier. As Bitcoin gets larger, it becomes exponentially more difficult to take over the market and raise the supply. We likely won’t see asteroid mining or a 51% attack on BTC in our lifetime, but if either of these events occur the respective asset's price will certainly be affected.

Current Cryptocurrency Prices

While there was a significant run up in cryptocurrency prices in early 2021, the market has stayed relatively flat over the course of 2021. Yes, there has been significant volatility in the markets, but for the majority of the year we've traded between a $35,000 to $60,000 Bitcoin. Cryptocurrency prices recently took a dip in December 2021, but major cryptocurrencies like Ethereum have remained strong regardless of Bitcoin's price action. Check out our cryptocurrency table below for up-to-date cryptocurrency prices.

Neither asset class is absolutely better than the other. While they are both stores of value, they are about as different as that type of asset can be. If you are looking for an investment strategy with high returns along with high risk and believe that cryptocurrency will succeed in the long term, Bitcoin is probably better for you. If you just want to hold an extremely safe and relatively stable asset that is a debatably effective hedge against inflation, gold investment is likely better for you. 

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