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IRA Financial Group Blog

Bitcoin vs Gold – Episode 271

Bitcoin vs gold
3 Minute Read

IRA Financial’s Adam Bergman Esq. debates the advantages and disadvantages of investing in Bitcoin vs gold, and what the future holds for our economy.

Alternative asset investing is key to a diverse retirement portfolio. By self-directing your plan, you can invest in almost anything. We all know real estate is the king of alternatives, however, it’s not always the best choice for someone. Gold and other metals have always performed well, but there’s a new kid on the block – Bitcoin. More and more people are investing in cryptocurrencies, as they continue their hot streak since the COVID-19 pandemic started. Now, it’s time to pit the two together, Bitcoin vs gold: who wins?

History of Gold

Since the dawn of civilization, gold, silver, and other precious metals have been regarded by investors worldwide as a unique store of value.

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Originally, the United States went by the “gold standard.” The paper money that was put into circulation was backed by gold. If you wanted, you could exchange that paper money for an amount of gold which was equal value. However, in 1971, President Nixon ended the “gold window,” meaning you could no longer receive gold in exchange for paper money at all.

In fact, the Gold Reserve Act of 1934 stopped all production of gold coins. Further, now only licensed private users and dollars held by foreign central banks were even allowed to be converted. Lastly, President Roosevelt increased the price of gold to $35/ounce.

The country effectively abandoned the gold standard in 1933, and completely severed the link between the dollar and gold in 1971. The U.S. now has a fiat money system, meaning the dollar’s value is not linked to any specific asset.  To help combat the Great Depression. The U.S. continued to allow foreign governments to exchange dollars for gold until 1971, when President Richard Nixon abruptly ended the practice to stop dollar-flush foreigners from sapping U.S. gold reserves.

The gold standard had both pros and cons, however, in the long run, it wasn’t feasible. The price of gold has always been favorable to other assets. Since the beginning of the 20th century, it has gone from under $400 per ounce, all the way up to $1850, which it stands at in 2021.

What About Bitcoin?

Bitcoin emerged after the financial crisis as an alternative to currencies created by central banks. Instead of being issued by order (“fiat”) of government or organization.

Bitcoin’s fixed supply—about 18 million have so far been mined and the total possible number of bitcoins is only 21 million—makes it an interesting choice as world reserve currency. At present, central banks can increase the supply of “fiat” currencies at will, which can result in runaway inflation. But in a bitcoin-based international system, banks or countries that issued digital currencies would have to restrict the supply of these currencies to the amount of their bitcoin holdings or face default if people called in their claims.

Bitcoin is an excellent store of value and medium of exchange, it’s relatively easy to store with the right precautions, and has, potentially, the ability to be accepted universally by any government, organization or individual, and in any divisible amount anywhere at any time.

Also, since it operates on the world’s most secure decentralized computer network, there’s no chance of counterfeit Bitcoin entering the system and no expensive ‘purity verification’ required as there is with gold.

Transactions can be done on a trust-less basis directly which is perfect for countries who have complex relationships with their neighbors and, since no one country can ever hope to take full control of the Bitcoin network, the system of transferring ownership can never be bought into question.

Bitcoin vs Gold

Bitcoin is often compared to gold since it shares some crucial characteristics such as the limited supply and supply growth through mining and the non-centrality and independence of central banks.

Gold:

  • Durable/ Divisible/Scarce
  • 1/2% growth a year in historical supply
  • Price not subject to hyper inflation
  • Hard to transplant
  • Functionality – can turn in jewelry

Bitcoin:

  • Bitcoin Supply of limited by design of its protocol
  • Borderless/ Permisionless/ Decentralized
    Only 21 million – predictable issuance rate
  • Bitcoin store of value unaffected by demand (Store of value refers to an asset that can be set aside for future use)
  • Far more portable
  • Bitcoin’s predictably scarce money supply depends on it being prohibitively expensive for anyone to take control of the network
  • Growth potential but not much functionality since digital
  • Volatile — as it’s only been useful for about seven years

Synopsis

This is just a brief outline of the Bitcoin vs Gold debate. Please, listen to the entire podcast as Mr. Bergman goes into more detail. Gold is a proven asset, which is a great hedge against inflation. The numbers bear out that it will continue to maintain (and increase) its value over the years. Bitcoin is a hot, emerging asset class. What these crazy times have shown us, is that it’s here to stay. Will it ever be commonplace to use cryptos to purchase goods? Who knows. But, as an asset, like stocks or real estate, it seems to have staying power.

As always, we appreciate you tuning in. Check out our Podcast Network page to see all of our podcasts. Mr. Bergman delves into all things retirement- and tax-related each week.

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