In an article last week, Kevin Hobbs of Vanbex Group told INN that the rise in the price of Bitcoin could be attributed to the fact that, “bitcoin has built up a very solid base then it has ever had,” and that, “ all the “Bad Actors” of 2016 seem to be long gone and forgotten.”
Kraken’s Jesse Powell also told us that the rising prices comes as no surprise, “[G]iven the trifecta of bitcoin’s growing demand, limited supply, and reduction in volatility since its introduction.”
Interestingly enough, back in 2014, Visual Capitalist published an infographic comparing gold and bitcoin, including its history and past performance.
The article below originally appeared on the Investing News Network on June 16, 2016.
Initially, it might seem absurd to compare gold and bitcoin. One is an age-old metal, the other a relatively new cryptocurrency.
However, despite these outward differences, the two stores of value actually have a lot in common.
Here’s a breakdown of the similarities between gold and bitcoin, and a look at why bitcoin might be giving gold a run for its money.
What is bitcoin?
Bitcoin is a type of digital currency, or cryptocurrency, that is produced and held electronically. Units of the currency are created by “mining” for bitcoin on a distributed computer network.
Unlike traditional forms of currency, like gold or dollars, bitcoin aren’t tied to any tangible store of value. Everything happens digitally when it comes to bitcoin.
Next to being entirely digital, bitcoin’s other most distinguishing characteristic is the fact that it’s decentralized. While extra dollars can be printed by a central bank to create new money, bitcoins can only be created by a worldwide network of computers who are all mining to product more bitcoin.
This means that no single bank or institution is in control of the bitcoin network, making it a particularly appealing currency during periods of political instability, inflation or insecurity.
Similarities between bitcoin and gold
As the term “bitcoin mining” suggests, there are numerous similarities between bitcoin and gold—many of them consciously self-fashioned by the bitcoin community.
For one, bitcoin’s value isn’t tied to a government currency. This means that if some form of government instability does occur, bitcoin will remain unaffected or even benefit from the situation. Therefore, for individuals who are skeptical of traditional banking institutions, nervous of war and other conflicts, or just wants to keep their finances distinct from a fiat currency, bitcoin is an incredibly attractive option.
The same, of course, can be said of gold. Mined directly from the ground, the gold’s worth is distinct from the currencies that it backs. While more money can be printed, the amount of gold available in the world is finite, making it—for some individuals—seem like a much safer investment.
However, gold differs from bitcoin in that the metal has an actual use value. Meanwhile, bitcoin is only ever worth as much as the market says it’s worth.
Transfers and fees
For all of their similarities, bitcoin does have some advantages over gold. For one, it’s entirely anonymous. While this may have some possible drawbacks (for instance, bitcoin’s popular adoption on the black market), it is also a core benefit in some scenarios. This is because the digital currency is also completely transparent. A record, called the blockchain, backs up every transaction ever made, making it a useful preventative action against fraud.
Furthermore, bitcoin is incredibly easy to transfer. While physically transferring gold bricks is an awkward way of exchanging value, bitcoin can be transferred in seconds online.
Additionally, the transaction fees for exchanging bitcoin are miniscule compared to conventional fiat currencies, making the cryptocurrency a particularly attractive option in remittances markets.
All told, bitcoin is never going to erase the value of gold. Rather, it’s helpful to see where these stores of value line up and diverge in order to become a more educated investor.
For individuals looking for unexpected currencies or unique stores of value, both gold and bitcoin fit the bill.
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Securities Disclosure: I, Pia Rivera, hold no direct investment interest in any company mentioned in this article.