The Benefits of Owning Bitcoin Over Gold

At first glance, comparing a shiny yellow metal known for its precious value to a newly minted, sometimes volatile digital currency may seem out of place at best and unfair at worst. But in fact, when we dive deeper into the mechanics that governs Gold and the dynamics that drive Bitcoin, it becomes clear that the comparison is not only fair but, at times, Bitcoin gains the upper hand.
So how and when can Bitcoin outshine Gold? To answer that question, we must first understand the forces that govern each.

What Really Drives Gold?

Gold has gained a reputation for being a safe haven in times of turmoil.
But that assumption is not entirely true. Gold, unlike bonds or stocks or even Oil, does not have any economic value and it pays no interest. Instead, demand for Gold is driven by one thing and one thing only—interest rates. When interest rates fall (especially US interest rates), because Gold trades primarily in Dollars, Gold prices rise. When rates in the US moved to nearly 0% back in 2008 and the Fed was printing trillions of Dollars, Gold benefited. But when economic growth returns and rates start to rise, Gold starts losing ground, because when times are good, stocks, bonds and much of the commodities space have significantly more to offer.

What Drives Bitcoin?

The value behind Bitcoin is a bit more complex. Bitcoin, unlike Gold, is not driven by investment but rather by its adaptation and acceptance.

Bitcoin has only been around since 2008 and as such, has not generally been accepted as a valid form of payment. And because Bitcoin is still not accepted as a form of payment in most places of business, most holders need to convert their Bitcoins back to the local currency in order to actually spend it.

But that is now changing and Bitcoin, despite some setbacks, is becoming more and more popular. Companies such as Amazon (AMZN), Target (TGT) and even Subway are now accepting Bitcoin. And the more businesses accept Bitcoin the less need to convert it back and so the value of the currency rises.

Of course, the risk in Bitcoin is the opposite of Gold. The entire capitalization of Bitcoin in circulation across the world is merely $7 billion. Just for comparison, total Gold reserves around the world are estimated to start at 150,000 metric tons, which is worth roughly $.5.4 trillion. That means that in turbulent times, when fear dominates, a currency such as Bitcoin can lose value quickly.

The Fed and Bitcoin

So which has the upper hand? Which outshines in the current environment? Is it Gold or Bitcoin? With the US Federal Reserve recently suggesting it could raise rates for the second time in 12 months, Bitcoin seems to have the advantage. Rising rates have hit Gold in its soft spot. Meanwhile, Bitcoin is largely immune to a Fed rate hike, even as it benefits from its growing adaptation. As long as we don’t get another round of turbulence it seems that Bitcoin could have the upper hand, and gain more traction and allure than Gold.
Published on May 27, 2016
By Nikolai Kuznetsov

Copyrighted 2016. Content published with author's permission.

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