Gold or bitcoin: Are they investment alternatives?

The high volatility of Bitcoin allows to obtain higher profits, but it can also cause very important losses. The Cryptocurrencies are the latest fashion among investors. In recent months, Bitcoin has become popular at a level reminiscent of the gold rush of the nineteenth century. In fact, some investors have begun to refer to it as digital gold or even as gold 2.0.

The comparison between Bitcoin and Gold is not entirely wrong since there are some similarities between gold and bitcoin. For example:

(a) In monetary systems based on the gold standard, there was an obligation to maintain a relationship between gold reserves and money in circulation, which imposed a certain monetary discipline and prevented states from excessively increasing the amount of money in circulation.

(b) This monetary discipline also exists with bitcoin since, due to the existence of a maximum number of bitcoins (21 million bitcoin, which will be reached around the year 2140), bitcoin is not susceptible to manipulation by any type of government or central bank.

While it is true that today Gold has lost its central role in the monetary systems, gold still acts as an alternative to financial assets in times of crisis or expansion of the monetary base by central banks. And, due to the similarities between bitcoin and gold, Bitcoin has gradually acquired that nature of alternative or defensive investment against the abuses of central banks .

However, in addition to the similarities, there are certain differences between gold and bitcoin that are important when deciding to invest in one or the other.

Gold Vs. Bitcoin

In the first place, Gold, in addition to being able to be acquired as an investment, has additional uses in jewelery, electronic components, chemical compounds and dental implants. The Cryptocurrency bitcoin serves only as a means of payment decentralized and not susceptible to manipulation (not to be confused with the underlying technology, the Blockchain or block chain, which itself is susceptible to additional uses).

In addition, Gold has a marked psychological value since it has been used for thousands of years, acquiring an emotional and cultural component. Thus, for example, at weddings in India, the dowry is composed of pieces of gold. Or in Christian culture, wedding bands are golden. It remains to be seen, still, if the bitcoin has acquired a similar psychological value.

Another difference is the simplicity with which Gold is understood and used. Anyone can easily understand that gold is a precious metal that is extracted from the mines and that can be exchanged with third parties and thus improve our personal finances.

However, Bitcoin is much more complicated to understand. Because bitcoin is a virtual and intangible currency whose process of creation is controlled by a mathematical algorithm that implies that very powerful computers (called "miners") perform a series of very complex calculations, receiving new bitcoins when they are the first to guess.

Means of payment

And, although Bitcoin can also be used as a means of payment, it is much more complicated to use since you have to download software on your computer or on your mobile phone that will act as a virtual "wallet"..

Each wallet or purse has a public address that can be used to receive money from other users and a private address that can be used to give payment orders. In addition, the sending of Bitcoins is instantaneous and any operation can be monitored in real time being recorded forever in the chain of blocks or Blockchain.

The disasters

To this we must add that the Gold that is in your possession can function as a kind of insurance in certain exceptional circumstances such as a financial Corralito (like the one that existed in Argentina in 2001 or in Cyprus in 2013) or a natural disaster (like Hurricane Maria in Puerto Rico in 2017). It is likely that in these circumstances you will be able to sell your Gold or, at least, exchange it for other products. However, if the bank payment systems stopped working or you did not have Internet access (as happened in Puerto Rico after Hurricane Maria), you would not be able to use your bitcoins.

Another difference is the uncertainty surrounding Bitcoin and the high volatility of its price. A recent study by Citi Private Bank referred to in Fortune magazine concluded that the correlation between the S & P500 and Bitcoin was non-existent and that the ratio between bitcoin and gold was only 0.054.

In addition, the price of Bitcoin depends largely on its acceptance, making it very sensitive to regulatory changes such as those that have taken place in China or South Korea. Gold, on the other hand, has a much lower volatility and a negative correlation with the stock market (which makes it an attractive investment in times of stock market declines).

Is gold better or worse than bitcoin?

Both are different assets that can be accommodated in the portfolio of an investor, with Gold being an investment of a defensive and conservative nature, and Bitcoin (and the remaining Cryptocurrencies) an investment of a more aggressive and speculative nature. The high volatility of Bitcoin allows to obtain higher profits , but it can also cause very important losses.

In any case, before investing, it is of utmost importance to be properly informed.

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