There are a lot of similarities between gold bugs and cryptocurrency enthusiasts. They seem to play on the same emotions of fear and greed. Is one better? Avi Gilburt compares and contrasts the two assets.
Recently, the Winklevoss twins (who founded the Gemini crypto exchange) coined Bitcoin: Gold 2.0.
To support their perspective, they cited Bitcoin’s scarcity, its fungibility and its portability as meeting or exceeding that of the yellow metal.
Grayscale Investments, the company that has brought crypto based trusts to the United States’ over-the-counter market, recently ran ads urging investors to drop gold as a relic of the past in favor of cryptocurrency, which is “secure,” borderless, and “actually has utility.”
It seems that there are more and more comparisons between Bitcoin and gold, but is one better to hold more so than the other? Well, to be honest, each has a different ultimate purpose for which each is better suited.
With gold and crypto starting to launch on their next bull run, we thought it would be fun to explore these questions. At the end of the day, we find each asset worth owning. And, for the libertarian minded, both assets provide insurance from inflationary fiat and the centralized banking system. Yet, each asset has their die-hard investors who view each asset as “the” asset to own, while they simultaneously look down at the other camp.
For example, gold bug’s such as Peter Schiff decry Bitcoin as “not viable as money, not a store of value and fool’s gold.”
Bitcoin fans simply consider gold a cumbersome hunk of metal with a value based on tradition rather than utility.
As far as we are concerned, each camp has a point, which is why we feel that one should diversify into both asset classes for the same types of protections. You see, gold and Bitcoin share values, which are sought after by both groups of investors: Separation from the centralized financial system, scarcity, security, portability and fungibility. However, whereas Bitcoin may better serve investors with certain of these benefits, gold will serve investors better with others.
Separation from the System
Regarding separation from the centralized finance system of the world, Bitcoin and gold are comparable. Both assets allow the holder to remain in control of their holdings, effectively becoming the bank for themselves. In that regard, holding either asset removes counterparty risk. Moreover, both allow for exchange between parties without intermediaries. And, finally, both are immune from the inflationary efforts of central banks.
Scarcity
All the gold ever mined is estimated at 190,000 tons and there is expected to be 54,000 tons in the ground. The current supply of Bitcoin is approaching 18 million and will never exceed 21 million. Furthermore, untold numbers of bitcoin are lost due to misplaced keys. Therefore, it is quite clear that both assets are scarce and finite, though one could certainly argue that Bitcoin is more so.
Security
The holders of both assets need to pay attention to security. For the gold holder security is not just a matter of keeping it from prying hands. There is a cost and risk to storage (just ask MF Global certificate holders) for larger holders who don’t keep it under their bed or in a safety deposit box. This is certainly one of the drawbacks of holding gold.
Yet, theft of cryptocurrency has been one of the biggest deterrents from adoption of crypto as a common asset class. Yet, with appropriate cyber security protections, one can keep their crypto secure. Given that it is not held in a physical location, there are no additional costs of storage. Moreover, if you don’t expose how you maintain private keys, you are unlikely to experience a physical robbery attempt.
However, the Achilles heel of Bitcoin is that it requires the internet and electric grids to run properly. Should electricity become compromised for whatever reason, gold would become the more desirable of the two assets.
Portability
I don’t think there is much of a question that Bitcoin wins hands down with respect to portability. Bitcoin is weightless and gold is more than 19 grams per cubic centimeter. This is why so many Venezuelans reportedly ran to Bitcoin to take capital out of the country. Doing so with gold is nearly impossible during such times of crisis.
Fungibility
Bitcoin and gold are both fungible. However, Bitcoin is much more easily divided into smaller units down to 8 decimal places. At current price, one could theoretically exchange Bitcoin worth 1 /100 of a cent. Try doing that with gold. Since units of gold generally need to be rated for investment level purity, it is quite hard to exchange less than a 1/10th ounce of gold, or roughly $140 at today’s price.
Conclusion
Perhaps gold and crypto investors can find some common ground, as they each have similar benefits, and are driven by similar fears. The benefits that have traditionally led gold investors to hoard the yellow metal are not too different from those driving today’s Bitcoin buyers. Nonetheless, as we’ve shared, both are expected to embark on their next bull run. And, a disadvantage to owning one asset is often an advantage of owning other. Therefore, we believe both deserve a place in your portfolio for at least insurance purposes.
And for the pure traders out there; the similarities and differences highlighted above create a starting point for potential arbitrage play. Since both react to similar fears, a trader can exploit conditions that may be more favorable to one over the other.
Ryan Wilday co-wrote this article
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.
