Crypto enthusiasts have always referred to Bitcoin as the gold, and Ethereum as the silver, of the digital currency world. However, neither coin holds an official label of gold/silver. Furthermore, real gold has always been considered to have the greatest store of value. Nonetheless, experts are debating whether Bitcoin will now push real gold to second place, and take over the first position. Here you can check about the Bitcoin opportunity or threats.
Similarities between Gold and Bitcoin
Bitcoin has been around for the longest time. According to market value, it is the largest digital currency. Therefore, investors/traders refer to it as digital gold. It could probably be because several similarities exist between gold and Bitcoin.
To begin with, both are stores of value, which have nothing to do with governmental systems or financial systems.
Then again, they are excellent as hedges against inflation. It is because gold is in limited physical supply, and so is Bitcoin. Bitcoin has a market capping of 21 million coins.
Neither of them has a high correlation with asset classes in the mainstream, such as bonds and stocks.
Dissimilarities between Gold and Bitcoin
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Safe-Haven Asset
Gold seems more reliable than Bitcoin, in this case. It is because even when marketplaces have not been at their most reliable, the pricing of gold has remained stable. The evidence is there in the way it has performed during the ongoing pandemic. In fact, its value only increased.
In contrast, Bitcoin has not survived market downturns very well. Sometimes, in previous years, it had lost much more than broad equity market benchmarks. However, its losses were less serious in comparison to the losses suffered by other cryptocurrencies.
Fortunately, Bitcoin has the capacity to bounce back quickly. It manages to overcome volatility very quickly. To illustrate, in 2011, Bitcoin’s value dropped by over 82%. Nonetheless, it was back in the marketplace within a span of just 14 months. Of course, it helps that Bitcoin’s popularity has never waned over the years. Crypto enthusiasts go for it, immediately, whether it is expensive or affordable!
Gold pricing, if it slumps, remains in the same position for prolonged periods. Sometimes, the slump lasts for a lengthy period, as it did from September 2011, until July 2020. An ounce could not fetch even $2,000.
Unlike Bitcoin, which moves and changes with market trends, gold just remains an unproductive asset. Thus, it loses out as a safe-haven asset.
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Digital Money
Bitcoin is the ideal alternative to paper currencies, or rather fiat currencies. To illustrate, it is a portable currency. The user may conduct transactions with it, from any and every geographical location. After all, it survives in the virtual world! There is no need to store it physically. However, it does require security, just as gold does! Therefore, the user must remember the digital wallet’s password always.
Gold requires a safe, physical place for storage. It is not possible to travel with gold bricks, coins, or ornaments. Gold is cumbersome, plus, there is the fear of being robbed.
Comparing the two, Bitcoin seems more suitable as money, for it possesses a store of value, is a medium of exchange, and is a unit of account. Furthermore, it might become the dominant cryptocurrency, online. Its blockchain is well-established and secure. Its peer-to-peer, digital cash system has a built-in trust. Above all, the cryptocurrency and the network are linked to one another. The blockchain requires to offer a native currency as an incentive to fund the resources that provide protection.
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Diversification Value
Gold and Bitcoin have displayed a negative correlation with the U.S. dollar. However, gold’s negative correlation is stronger, in comparison to that of Bitcoin. Whenever the U.S. dollar goes down in value, investors turn to gold. At such a time, the prices of commodities go up, and so do, gold prices.
Bitcoin is unable to provide stability. Also, it is idiosyncratic risk. Therefore, it does not prove a good hedge against the adverse effects caused by the falling dollar.
The positive side of Bitcoin is its ability to be a hedge against increasing interest rates. It displays a negative correlation with long-term bonds. This is helpful when interests are rising.
In contrast, gold has a positive correlation with long-term bonds. If the prices rise/fall, gold prices increase/decrease.
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