How would you like to invest in something that costs less than three cents per unit, but will grow into several hundred dollars within a year? Chances are, you will not be alone in agreeing to such an opportunity. However, such opportunities are quite rare unless you are talking about pyramid or Ponzi schemes. The reality is that there is such an investment opportunity that currently exists and it’s called Bitcoin. This is a very exciting investment opportunity that is not based on reality. It is a purely digital creation created by open source software that mines for new Bitcoins using highly complicated computational algorithms. It also has a fixed quantity. Once a certain number of Bitcoins are created, no new ones can be made. It is due to this combination of factors that a Bitcoin is such a hard investment commodity now. At one point, a Bitcoin reached a zoom past $1000 per coin. This is quite phenomenal considering the fact that as recent as 3 years ago, Bitcoin was selling for only a fraction of a penny. As amazing as a Bitcoin maybe as an investment option, it’s a good idea to compare it with a proven investment option. Of course, I am talking about gold. Here is a quick analysis that compares Bitcoin and gold.
Gold is Easy to Track / Bitcoin is More Difficult
Gold is easy to track because it has a global tracking system. This helps to preserve the value of the investment option because it makes it harder to fake, steal or misroute. Sadly, the same cannot be said about Bitcoins. In fact, one of the biggest Bitcoin exchanges MT.GOX based in Tokyo, Japan crashed recently because of a flaw in their software that allowed hackers to steal millions of dollars worth of Bitcoin. Moreover, tracing Bitcoins is impossible because it is originally designed to evade government entities. Whether you are going to avoid paying taxes or try to fund activities that should not be funded, Bitcoin is there. It is untrackable and highly-encrypted. No wonder, it was the preferred digital currency of choice for online drug dealers and people looking to get other people assassinated and other cyber criminals. Keep this in mind because this can be a serious limitation on Bitcoin should global governments decide to regulate these cybercurrencies.
Gold is Rare, but Bitcoins are Rarer
One key factor where Bitcoin truly shines is its rarity. While gold is rare, Bitcoin is much rare because there is a limited amount of it that can come into existence. The software stops producing beyond that limit. This is crucial to understand because whenever supply is restricted, and demand is high, price goes up. This is economics 101. The higher the demand and the lower the supply, the higher the price will become. Gold, on the other hand, goes to supply-and-demand cycles where high demand for gold pushes miners to look for newer sources of gold. Moreover, when gold is expensive enough, people all over the world would cash in their gold jewelry and coins. Then a lot of these materials are melted to create pure physical gold.
Gold has a Solid Global Network of Exchanges / Bitcoin Exchanges are Still in Transition
As mentioned above, a Bitcoin exchange MT.GOX recently crashed. Usually when exchanges crash, this produces a lot of certainty regarding the investment instruments being traded by those exchanges. Fortunately, gold doesn’t have such a problem with exchanges. In fact, it has so many exchanges that Bitcoin cannot even compete with. Moreover, gold’s global network of exchanges is fairly transparent because the pricing signals are clear. On the other hand, Bitcoin isn’t so clear. There are only a few exchanges that are different from each other. If enough of these exchanges experience issues down the road, this can cause a crisis in confidence that may affect Bitcoin value.
Gold has a Solid Baseline Value / Bitcoin is Purely Speculative
The great thing about investing in gold is that there will always be an industrial demand for it in terms of jewelry. In other words, there is baseline value for it. Its price cannot crash below a certain line otherwise it would hit this base demand. Pair that with the fact that gold has historically been viewed as a store of value because it can be tapped during uncertain economic times. However, the same cannot be said about Bitcoin because it is purely speculative as there is no industrial use for it is only a digital creation. It only exists in the internet and hard drive storage and servers. This is why it’s very important to pay attention to Bitcoin’s nature. It does not exist yet people make bets on it. However, just like with anything purely speculative like the Dutch Tulip Mania of the 1600s, once enough people stopped believing, the value of the investment crashed to the floor.
Gold is Easier to Convert Into Cash
Gold has the same value all over the world. This is a key factor to keep in mind when comparing Bitcoin to gold. This is due to the fact the people all over the world want gold. However, the same cannot be said about Bitcoin. Only a select number of investors are interested in it. This is a crucial point in analyzing Bitcoin vs. gold.
It may seem crazy comparing Bitcoin to gold. After all, gold is a historical store of value and is recognized all over the world. However, considering the huge appreciation of Bitcoin, an analysis of these two is more than warranted. A lot of investors may be tempted to invest in Bitcoin. The factors stated above should be kept firmly in mind. While Bitcoin does have a lot of good things going, there are still a lot of questions regarding this particular investment vehicle. Lined up with an analysis versus gold analysis, be careful not to engage in wishful thinking. Focus on the facts and risks. This is the proper way to do a Bitcoin vs. gold analysis.