Bitcoin has been nicknamed digital gold because many of its properties are similar to those of gold. Bitcoin is scarce, portable, durable, divisible, largely fungible, and has utility, just like gold.
However, the most important reason why Bitcoin is also digital gold is probably its scarcity and the difficulty of creating new Bitcoin. Indeed, new Bitcoin are created through a process called mining, similar to the mining of gold. The difference, however, is that gold mining requires heavy equipment, a lot of labor, and gold mines, while bitcoin mining only requires specialized mining hardware and energy.
Even though many investors consider Bitcoin as digital gold because it is very similar to the precious metal, there are also significant differences between the two.
Let's now take a look at the similarities and differences at a glance.
Just like gold, Bitcoin is scarce, portable, divisible, durable, largely fungible, has utility, and is created through mining.
However, there are also some significant differences.
Probably the biggest difference is in the condition of the respective assets. Gold exists in physical form and can be verified with a little effort. In the past, people would drop gold coins on the ground and listen to see if a certain sound would be heard as a result. This is where the term Sound Money comes from. Today, this can be tested with a magnet. Real gold is not magnetic. But if you want to be sure, you have to have it chemically analyzed.
Bitcoin is purely digital. Physical Bitcoin coins do not exist. This has its advantages, of course. Especially in difficult situations, for example if you have to leave the country because of a war, this is an advantage because you can store your Bitcoin digitally and do not have to physically carry or hide them. In addition, there can be no counterfeit Bitcoin, because every Bitcoin transaction is verified by all nodes in the Bitcoin network.
The physical form of gold is thus a disadvantage in some respects, as it is difficult to transport gold easily and unnoticed. If you have a few kilos at home, you couldn't just carry them around in a bag. But if one has larger gold reserves, transportation becomes even more difficult. In crisis situations where you have to leave the city or the country, gold thus has clear disadvantages compared to Bitcoin.
Another disadvantage of gold is its centralization. As you can see from the chart, the majority of gold is stored in vaults of central banks and has been permanently expanded since 2008. This is due to the poor portability.
This is a danger because this centralization encourages the creation of paper gold. Thus, gold is offered at the current price in the form of a receipt or paper. Unfortunately, this method of issuing paper gold has been abused over the last 50 years, as banks have issued more of it than they effectively had in their reserves. In the gold world, this is referred to as paper gold to gold inventory, and the ratio here is calculated to be 200 to 1.
This can lead to a problem, if everyone wants to get their gold from the vault at the bank and the bank does not have enough reserves, there will be shortages. Therefore, when buying gold, it is probably advisable not to buy gold securities, but to buy physical gold. This way, one can make sure that one really owns the gold that one buys.
By the way, such an over-spend is not possible with Bitcoin, as they have solved the well-known double spend problem. Bitcoin's proof-of-work protocol ensures that no one on the network can simply duplicate coins or change Bitcoin's total supply on a whim. There will never be more than 21 million Bitcoin at the protocol level.
The comparison of the returns of the two assets is also exciting. If you compare the annual returns over the last 10 years, you will quickly see that Bitcoin has clearly outperformed and always recovered quickly after bear markets.
Of course, one cannot infer future performance from past performance, but Bitcoin seems to be slowly taking on the monetary confidence of gold. A look at historical returns shows that Bitcoin is probably the better investment when looking at average annual returns in the past.
There is no guarantee whatsoever that Bitcoin will have a similar price performance over the next ten years. But given the growing acceptance of Bitcoin and the wave of positive developments in the Bitcoin industry, the chances that Bitcoin will continue to outperform gold are probably quite high after all.
Where gold dominates, however, is in market capitalization. Gold has a much higher market capitalization than Bitcoin. Gold has a market capitalization of nearly $12 trillion. Bitcoin, on the other hand, has a market cap of $400 billion. However, it may only be a matter of time before Bitcoin grabs a solid chunk of that.
In the bull market last year, we saw that Bitcoin already has the potential for a market capitalization of 1.2 trillion. Gold is still way ahead at 11 trillion and has established itself as an asset after 5,000 years. Bitcoin is still relatively young at 14 years and will see some volatility.
The answer to this question, as so often in investing, depends on you and your investor:inside profile.
Those who prefer to be a bit more conservative are probably in good hands with gold. It is still the king among precious metals and offers a safe haven in times of high volatility on the global markets. However, average annual returns are not so rosy for gold, especially when looking at the last decade.
Bitcoin, on the other hand, is clearly the riskier investment. However, the higher risk has so far been rewarded with very high average annual returns. In addition, Bitcoin stored in a personal Bitcoin wallet are easy to transport and send. So if you want to spend your Bitcoin, you can do so without any problems. This is not the case with gold.
We at Coinfinity prefer Bitcoin. Not only because we believe that Bitcoin is a better investment than gold, but also because we are convinced of the Bitcoin message. Bitcoin's monetary policy is predetermined, thanks to proof-of-work you make sure it is not manipulated and you always have access to your assets. No matter where you are in the world, you can always access your Bitcoin assets.
Bitcoin is often compared to gold because of many similar characteristics, such as scarcity, divisibility, portability, durability, usability, and a high degree of fungibility. As a result, both have established themselves as stores of value and safe havens in times of high market volatility in global markets.
Yes, Bitcoin could replace gold. For that to happen, the value of Bitcoin would have to increase 25-fold. Then it would reach the same market capitalization as gold. Given the tech-savvy nature of the younger generations, it's not too far-fetched to assume that more and more investors will buy Bitcoin rather than gold bull ion in the coming decades.
Currently, Bitcoin's capitalization is below $400 billion. At its peak, it was nearly 1.2 trillion. In comparison, gold's market capitalization is just under $12 trillion. If the total market capitalization of Bitcoin were ever to equal that of gold, one Bitcoin would be worth more than $400,000.
