Gold: Arguments in Favor
Gold has been the fascination of human societies for thousands of years. For the majority of this time, gold has been used as a medium of exchange, thanks to its high value-to-weight ratio. The precious metal is undeniably beautiful for use in jewelry and gold plating and doesn’t rust or perish over time. The acquisition of gold has long been a method used by humans to demonstrate their power and wealth.
Gold is highly scarce, with only about 200,000 tonnes of the stuff having been discovered so far, so says the World Gold Council. For this reason, gold has historically also been seen as a great store of value that could be passed on through the generations. No corrupt or incompetent government can print more of the stuff to fund this or that endeavor via an inflation tax.
In more recent history and since the maturation of global financial markets, gold has become an established investment vehicle. Central banks and governments hold substantial sums in their reserves. The precious metal also has a track record of performing well as a safe haven asset/inflation hedge in periods of economic stress/high inflation. Its industrial use has also been rising, given its properties as a highly malleable superconductor metal. Small quantities of the stuff can be found in most mobile phones.
Given its physical properties, cultural significance and strong track record dating back thousands of years, those wanting to store value into the future can be pretty confident in gold.
Gold: Arguments Against
Unlike Bitcoin, the supply of which is capped at 21 million, the supply of gold has historically risen by about 2% each year amid new discoveries and continued extraction. That implies a doubling of the gold supply every 36 years. That is roughly in line with the inflation rate targeted by major central banks like the Fed, ECB and BoE.
Meanwhile, the mining of gold is a very energy-intensive/destructive business. Critics highlight that gold mining has a long track record of contaminating water sources with dangerous chemicals and destroying local, often pristine ecosystems. According to one environmentalist website, extracting the gold used in a standard wedding ring involves the production of 20 tonnes of waste.
Gold is also often the target of theft. Holders of the stuff risk losing it if not stored securely. That means that many owners of gold who are holding it for its store of value properties opt to store their gold in the vault of some counterparty, such as a bank. That introduces the problem of having to trust a custodian not to steal, lose or abuse your gold. Over the years, gold deposits at banks/trusted storage facilities have frequently been confiscated by corrupt/inept governments.
Meanwhile, gold does not produce any yield. That means that, in the past, alternative safe-haven assets such as government bonds have offered a greater appeal. When government bond yields rise, this raises the opportunity cost of holding non-yielding precious metals, burnishing their appeal.
Bitcoin (& Crypto): Arguments in Favor
The wider adoption of blockchain technology – i.e. of decentralized databases – looks inevitable. Satoshi Nakamoto, the anonymous creator of Bitcoin, bequeathed the world with the first use case of the technology back in 2009 – the bitcoin blockchain. Since then, there has been an explosion of use cases of the blockchain, with the technology going beyond just money and seeking to transform financial services, gaming, trade, social media and much, much more. Technologists refer to it as the rise of Web3.
It is widely assumed that leading cryptocurrencies like Bitcoin and Ethereum should be able to ride the wave of greater crypto/blockchain technology adoption, suggesting the prospect of continued outsized gains in the coming decade.
But the key subject of this article is comparing Bitcoin and crypto to gold. So starting with the former, how does Bitcoin compare?
As noted, its supply is capped at 21 million, meaning it is scarcer than gold. Just like gold, it is highly divisible. Each bitcoin can be broken into 100 million Satoshis.
Unlike gold, transactions between bitcoin users can occur nearly instantaneously across any geographical location. Granted, digital paper claims to gold can be transacted at the same speed, but then there is the problem of trusting a third party to hold the actual physical gold.
Whilst gold does have a solid history of protecting wealth through humanitarian crises, crypto has proven superior in recent years. For example, Ukraine has raised $130 million in crypto donations since Russia’s invasion. Ukraine certainly isn’t asking for the delivery of physical gold to fund its defense. Meanwhile, refugees from the war have found it much easier to access crypto payment solutions via a mobile app as their domestic currency collapses than they have to transact in physical gold.
Meanwhile, no third party is needed in a Bitcoin transaction between two users. That means Bitcoin holders are less exposed to the risk that someone else will steal, or abuse, or confiscate their gold. Even if a gold owner chooses to take custody of the precious metal themselves, making it secure from robbery involves significant cost. Contrast that the Bitcoin, where the only way someone could steal it is if they got hold of the private keys to your digital wallet.
In many ways then, Bitcoin achieves greater decentralization compared to gold.
Turning to the pros of crypto more broadly over gold; smart-contract enabled blockchains like Ethereum, Solana, Cardano, Avalanche and more do not just function as a form of money, but also allow for the creation of applications on top of them. The last few years have subsequently seen the emergence of Decentralised Finance (DeFi), which allows users to engage in the provision/consumption of financial services without needing to go through a bank or institution.
Such innovations never emerged from gold. Crypto and blockchain carry the promise of transforming many aspects of daily life, beyond just financial applications.
Bitcoin (& crypto): Arguments Against
Of course, the above is all well and good, but crypto also has some big drawbacks.
Firstly, its price action in recent years suggests that crypto remains a highly speculative, risky asset class to invest in. Given continued difficulties in assessing Bitcoin’s inherent value, it continues to experience wild price swings. Bitcoin is certainly not viewed as a safe-haven asset just yet, even though its track record as of late is that it is the best haven within crypto.
In recent months, Bitcoin and crypto more broadly have had a strong positive correlation to the most speculative corners of US equity markets (i.e. tech and growth stocks). Bitcoin’s realized volatility in recent years has been in the region of four times higher than gold. Other less liquid cryptos experience even larger price swings.
The poor performance of Bitcoin and crypto as of late also damages the claim that it can act as an inflation hedge. Where gold has held up well amid the onset of the first global inflation surge in decades, cryptocurrencies have collapsed amid expectations that global central banks will tighten financial conditions, damaging the most speculative corners of the market.
Meanwhile, crypto has struggled to shake its reputation for attracting criminals and scam artists, who seek to exploit its permissionless, anonymous characteristics. For many years, Bitcoin was the currency of choice for users trading illicit substances via the Darkweb.
More recently, the advent of the still unregulated DeFi ecosystem has been a boon for scam artists seeking to exploit vulnerable retail crypto investors. Investors are often drawn into investing in new crypto schemes/projects with the promise of high returns, only to find that the project was just a big Ponzi scheme designed to pay off the early holders. When the project developers abandon ship after dumping their holdings, this is what’s referred to as a rug pull.
Additionally, there is the risk that the cryptocurrencies such as Bitcoin are banned. China has already taken this step, as the authoritarian government there looks to increase control over the everyday lives of its citizens through the implementation of a centrally controlled central bank digital currency (CBDC).
While democratic nations like the US, UK and in the EU have signaled no intention to ban crypto, they are all still looking towards the creation of their own digital currencies, with the EU seeming particularly keen. The introduction of CBDCs could stymie crypto’s future growth prospects.
Whilst Bitcoin seems to have secured its status as a digital commodity, meaning it won’t face regulation from the US (or other) Security and Exchange Commissions, the same cannot be said for much of the rest of the crypto market. Proof-of-Stake blockchains like Solana and Cardano (and also soon Ethereum once the merge takes place) offer yield when users stake their cryptocurrencies to secure the network. That arguably makes them securities.
Many cryptocurrencies are also not as decentralized as they claim, with a centralized group of developers able to adjust their rules/parameters ad hoc. This further strengthens the argument that they may be securities, not commodities. If much of crypto does fall under SEC purview, costly regulatory compliance could further stymie growth and innovation.
Meanwhile, cryptocurrencies like Bitcoin are reliant upon the internet. Global internet infrastructure is more fragile than many people realize and is heavily reliant on underwater cables which are vulnerable to attack. Whilst it may seem as though the continued spread of the internet around the world is inevitable, there is always the risk of some sort of internet-ending global cataclysm. Of course, in such a scenario, it’s debatable how useful gold would be. But if civilization needs to rebuild itself from the ground up, it would be a better asset to own.
Finally, crypto critics argue that cryptocurrencies aren’t even scarce. While Bitcoin is capped at 21 million, there is no limit to the variations of Bitcoin that can be created. Indeed, there is Bitcoin Cash, Bitcoin SV and Bitcoin Gold, plus another many thousand more cryptocurrencies to choose from.
In that sense, Bitcoin seems more analogous to a social media site that relies upon network effects. At the time, MySpace and Bebo seemed like dominant players in the social media space, but eventually, something better came along and took over – Facebook. Instagram, Twitter and Facebook are now losing ground to TikTok, as history repeats. In the same manner, there is nothing stopping crypto preferences from changing and Bitcoin (or any other cryptocurrency for that matter) from being replaced by a better version of itself.
The Bitcoin (& crypto) versus gold debate will inevitably continue in the years ahead. But in many ways, it is a silly, futile debate. While it might be claimed that the two asset classes share some characteristics, they form very different parts of an investment portfolio.
For now, Bitcoin and crypto can be viewed as one of the riskiest additions to a portfolio, but likely with the most potential upside. Gold, meanwhile, will continue to serve as a steadfast safe haven and long-term store of wealth, though with limited upside prospects.