There is a legitimate question of whether Bitcoin can replace gold as a more secure way to store value. Gold has traditionally been used for this purpose but if just a little bit of research is done it is easy to find out that the illusion of gold has been manufactured.
Mankind has been drawn by the luster of gold for millennia. Empires have been built on it, bloody wars fought over it and for a very long time the world´s economy was based on gold more than any other commodity. But the fact is that gold is valued based on one simple principle: supply. If the supply of gold in circulation goes down, the price climbs. When the market releases too much gold at one time, the price drops again.
The Illusion of Value
Gold is said to have “intrinsic” value. Gold is also said to be of high value because it is both rare and there is a finite supply. Investopedia defines intrinsic value like this:
“The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.”
The operative phrase in that definition is “underlying perception”: gold has more value because we say that gold has more value. The fact is that we need a medium of exchange and gold is both rare and flexible. You can store it in a vault, use it to make currency or wear it as jewelry.
But all of that can also be said of most metals. The fact that gold is “rare” is the one difference in this equation. The news over the last few years has talked extensively about the fact that gold mines are “drying up”. These rumors are often cited to explain the 400% rise in the price of gold over the last two decades.
The fact is that a scarcity of gold has little to do with the price of gold. Even if gold were becoming hard to find on Earth recent discoveries on the asteroid Eros indicate that there is more gold on that one small space rock, 20,000 times more, than is produced on Earth in a single year.
The asteroid Eros contains up to 20 billion tons of gold ~ worth 20,000X everything produced on Earth each year. pic.twitter.com/EECky7VVpc— Andrew Rader (@marsrader) December 12, 2014
If that asteroid was mined and the resulting ore subsequently dropped on the global market the price of gold would drop significantly. The United States Space Program is a shambles but the rest of the world, along with private interests, seems to be moving ahead at full steam.
Gold is not even close to the sure bet that most investors think it is. Anyone who digs deeply enough into the history of gold price rises and falls will know that gold prices do not necessarily rise during times of inflation, a conclusion reached by Campbell Harvey, a professor at Duke University’s Fuqua School of Business.
We can come to the same conclusion simply be remembering that the current upward spiral began during the late 1990s when the American economy was booming. Harvey suggested that gold prices go up for one reason: gold prices are going up. In other words, potential investors see prices making a surge and jump on the bandwagon, which drives prices up further.
Bitcoin as an Alternative
While Bitcoin cannot solve all of the world´s financial problems, and is certainly not a bullet-proof investment, Bitcoin has many aspects that make it a much safer bet than gold, or any precious metal. While there are many of these aspects, two of them stick out from the crowd:
- We know that despite common belief, gold is not finite in any real sense of the word. As mankind expands its search, especially into space, the supply of gold and other precious metals will continue to expand with us. This is not true with Bitcoin. The virtual currency actually has a point when no more Bitcoin will be produced, making it essentially inflation-proof.
- The price of gold is largely determined by trading activity on centralized markets. When people begin buying gold a rush usually begins and the price begins to soar. But as we have seen during the last quarter this is not necessarily true with Bitcoin. The price of Bitcoin has plummeted while trading has risen along with consumer interest and merchant acceptance.
Professional investors, along with people seeking safe refuge should be very attracted to the first of the above reasons. Inflation is one of the primary drains on any long-term investment and gold is not inflation-proof. The second reason should be enough to convince anyone however because acceptance, consumer confidence, is one of the best indicators of a currency’s strength, with inflation being another strong indicator.
Decentralization of our economy in general, and Bitcoin specifically, are both still in their infancy. We have experienced both a Great Depression and several major recessions during the last 90 years and all of this can be traced directly back to the centralization of the system that began in the first half of the 20th Century. Albert Einstein said that the definition of insanity is doing the same thing repeatedly and expecting different results.
Bitcoin is not, and cannot be, a definitive solution. But when we are considering whether to invest in Bitcoin or invest in gold, Bitcoin has clear advantages over the metal, especially in times of questionable inflations and deflations of our personal buying power. Keeping this in mind smart investors should at least consider diversifying their portfolio by adding Bitcoin to their investments.