The recent rise in the prices of cryptocurrencies, especially Bitcoin, has attracted the attention of investors and increasingly, this virtual currency is referred to as “digital gold”. The reason for this comparison is that both of these assets, gold, and cryptocurrencies, are monetary goods, i.e. quantitatively limited and almost with the same function as money. However, gold and bitcoin have some differences.
Bitcoin is a decentralized, digital “peer-to-peer” currency that was first created in 2009 through “mining”. Gold as a precious metal is a tangible asset that has been valued for thousands of years. Here, we delve into details about the key differences traders need to know to be ready to trade Bitcoin or Gold.
Cryptocurrencies, of which bitcoin is undoubtedly the best known, have a much more speculative character due to their great growth potential. Arguably, this is the main feature, along with scarcity, that has attracted the attention of investors. Amon-Avis details that the Average True Range (ATR describes how much a market moves on average over a certain period.) of Bitcoin is much higher compared to gold. However, it is important to consider that an increase in the potential growth also corresponds to an increase in the associated risks.
While digital currencies quadrupled their value throughout 2020, on the other hand, it brought with it a high degree of volatility.
The way bitcoin and gold are stored is completely different. For example, gold, depending on the quantity, requires warehouses, vaults, or safes. We can’t walk around with a certain amount of gold in our pockets, we cannot carry large sums without involving some risk. On the contrary, bitcoin allows us to carry large sums of money and which hardly takes up a small space in our pockets because they are stored in a digital wallet or exchange. La Formule Francaise recommends that storing bitcoin can be extremely dangerous if you don’t use a hardware or software wallet to secure your private key.
Gold has a history that goes back thousands of years which makes its demand drivers easy to identify. The demand for Bitcoin tends to be traced back to price speculation, buy-to-hold strategies, and the underlying blockchain technology itself.
- Medium Of Exchange
Gold is not commonly used as a means of payment, as it does not meet certain criteria. Although it is interchangeable and divisible, this process cannot be done easily and without complications. Yet gold has proven throughout its history to be a valuable haven. Bitcoin on the other hand emerged as a new form of digital money, decentralized and independent, which is not managed or controlled by any entity. It, therefore, represents an alternative to fiat money, since it operates in a completely transparent and open system, both for users and for the community in general.
Bitcoin cannot be counterfeited. The system has a network of nodes distributed globally, which have the task of verifying every transaction performed. And if they detect a scam or fraud attempt, they immediately reject it. The same cannot be said about gold which can easily be counterfeited.
Digital currency is certainly an interesting asset, but it cannot (yet) be considered a haven like gold. The precious metal has a long history behind it and has always been considered a reliable substitute for money while Bitcoin is notorious as a particularly volatile asset. Higher volatility brings with it the need for more comprehensive risk control in the form of position sizing and well-defined stop and profit-taking levels.