The fundamental differences between Gold and Bitcoin (BTC)

Gold and Bitcoin have everything to reconcile. Both assets are available in limited quantities, they have no nationality, and serve (or served) as a means of exchange. However, while it is undeniable that certain characteristics unite Gold and Bitcoin, many things distinguish them. The structure of the Gold market is very different from that of the Bitcoin (BTC) market. Will Bitcoin be able to replace Gold as some claim?…

What Gold and Bitcoin have in common

While Gold has experienced extraordinary performances for almost 20 years, the even more impressive emergence of Bitcoin could call into question the primacy of Gold. Indeed, many characteristics of the use of Gold or Bitcoin come together.

Means of exchange without counterpart

A first fundamental argument of the proximity between Gold and Bitcoin is the absence of compensation. That is to say, Gold, like Bitcoin, is no one’s debt.

On the other hand, holding the dollar or the euro amounts to holding a right (a claim) towards your bank and the central bank. In the event of bankruptcy or failure of the banking system, it is entirely possible that the dollar or euro will lose their value.

In this context, Gold and Bitcoin ensure full ownership to those who hold them, unless dealing with a third party. In law, full ownership is characterized by usus (the right to use), fructus (the right to enjoy and profit) and abusus (the right to dispose of the thing). Gold and Bitcoin perfectly combine fundamental elements of ownershipwhich is not necessarily the case with currencies (dollar, euro, etc.).

Transnationality

An essential advantage, and too often forgotten, is that of transnationality. The euro is associated with the eurozone, with its economic performance and its geopolitical strategies. Likewise, the dollar is associated with the United States, which also has its own economic organization and its own geopolitical strategies. To own the dollar is to own part of the United States.

Therefore, what medium of exchange is as devoid of national identity as Gold or Bitcoin? None… Gold, and to a certain extent Bitcoin, have the advantage of not belonging to any region of the planet. Gold and Bitcoin are assets of sorts “transnational“, without political or geopolitical label. This characteristic probably constitutes a considerable advantage in order to carry out exchanges throughout the planet, independently of the arbitrariness of political powers.

In other words, which assets outside of Gold and Bitcoin best approximate a “world currency” who doesn’t say his name? A sort of global currency recognized spontaneously, outside of any political influence, deserves a certain value in the eyes of Humanity.

Scarcity of Gold and Bitcoin

Finally, a third quality is that of rarity. Gold is available in limited quantities underground, just as the number of bitcoins is already determined. However, almost 70% of all Gold mined in the world was mined after 1950! Additionally, we have never mined as much Gold as we do today.

If Gold seems to be in limited quantity, then it is not entirely fair in terms of flow. On the other hand, the quantity of bitcoins mined decreases over time in a determined manner. So here we see a first major divergence between the two assets.

The major differences between Gold and Bitcoin

A certain number of elements thus bring together Gold and Bitcoin. But the capitalization of the Gold market, estimated between 12,000 and 13,000 billion dollars, far exceeds that of bitcoin. Furthermore, if Gold were an action, it would be the first capitalization… in the world!

Different fundamentals

What determines the fundamental price of Gold? And that of bitcoin?

This debate leads to particularly interesting conclusions. While we have never mined as much Gold as we do today, the price of Gold has never been higher. A strange paradox at first glance…

However, gold mining is only possible if the cost of producing Gold is less than or equal to the market price. In addition, mining production represents up to 80% of the annual supply of physical Gold! Under these conditions, it is obvious that the cost of producing Gold determines the price of Gold to a greater extent than the quantity mined.

In the case of Bitcoin, the mining supply is reduced every year. Additionally, the cost of producing bitcoin appears to be correlated with its long-term price. But this is mainly because the number of users is increasing, which requires a larger network maintenance cost. A major fundamental of bitcoin is therefore the effective number of users in the long term.

“In the long term, therefore, we can reasonably think that the price of bitcoin is directly linked to the interest that stakeholders have in keeping it in operation. And just like gold, just like money, it depends on trust. As long as this confidence persists, bitcoin will have a floor price: that of its minimum value to make it exist.“

The fundamental value debate – Tremplin.io

Of the “safe havens” ?

Bitcoin is highly correlated with stock indices (up to 90% correlation) and very sensitive to liquidity. The price of bitcoin (BTC) sometimes announces reversals on the indices a little in advance… Consequently, it is difficult to qualify bitcoin as ” safe investment “. Indeed, the extreme sensitivity of bitcoin (BTC) adds to its high volatility. Bearish movements of up to almost 80% induce strong uncertainty for a buyer at the peaks.

On the other hand, Gold shows great long-term price stability. It has one of the highest return/risk ratios. However, some criticisms of the quality ” refuge “ Gold returns regularly. But the arguments against the refuge quality of Gold have been shown to be inaccurate in recent years.

Bitcoin therefore has an indisputably speculative aspect that Gold does not possess. This essential difference implies that the two assets must be approached differently in the portfolio.

Two essentially incomparable assets

SIn form, Gold and bitcoin seem to combine. Basically, many elements distinguish them.

A false imaginary symbolism

Bitcoin is generally symbolized by a gold coin, with a B evoking the dollar. The symbolism of bitcoin is rich in lessons on the concepts it mobilizes. Indeed, a collective imagination of “digital gold” was built around bitcoin. Despite everything, the fundamental behavior of the bitcoin price is very different from the fundamental behavior of the gold price.

In most traditions and religions, Gold symbolizes eternity and the reflection of Light. It is also a source of stability, prosperity and elevation. Bitcoin thus seeks to raise the same hopes as its distant ancestor. But the fact that Gold remains a physical asset that is difficult to fungible (non-fungible for investment from a few grams of Gold) also differentiates it from Bitcoin. Indeed, most bitcoin holders own a fraction of it, whereas it is not possible to hold a fraction of a bar or gold coin for example. Gold, which remains a very malleable metal, is however not as easily reducible as bitcoin.

Thus, Gold cannot be transformed into a digital element, just as bitcoin cannot be transformed into a physical element. The two assets do not belong to the same world.

Two different assets cannot be confused

Gold and bitcoin are therefore different, or almost. Although both assets constitute a form of currency movement, the fundamentals of the two markets are not comparable. In addition, bitcoin does not meet the same needs as Gold: where bitcoin responds more easily to the motive of a means of exchange in the 21st century, Gold responds more easily to the motive of a store of value.

A fundamental property for a manager is therefore that two different assets cannot be confused. Even if bitcoin became a universally adopted means of exchange, gold would remain for its physical qualities and its stability. Gold implies a passive concept of money (the parameters of the Gold market act on the currency independently of human will), while the bitcoin involves active design of moneyby humanly determining the parameters that set the currency.

Therefore, the reasons for holding Gold are generally not the same as the reasons for holding bitcoins. But it is obvious that these two assets also respond to human needs that only they are able to satisfy: transnationality, means of exchange without compensation, and scarcity.

Gold or bitcoin or both!

Peter L. Bernstein wrote with great accuracy that gold is a “metal for all seasons” of Humanity, whose primacy he embodies. But it is logical and appropriate to observe new monetary forms with the evolution of available technologies.

Finally, it would be unfair to reduce these two assets to a few properties. There is this scene in history where the Aztecs asked Hernan Cortes, Conquistador, where this passion for gold came from. The latter found an answer… “I and my companions suffer from a heart disease that can only be cured with gold”…