In recent years cryptocurrency like bitcoin has continued to grow in popularity as an international and decentralized form of currency. In recent years, its popularity has started to compete with gold which has historically been an economic benchmark for valuing currency. Demystifying the differences between these two options can have a major impact on your investment strategy.
What Is Gold?
As an element gold has some rather interesting properties that have contributed to its value throughout the centuries. It will not bond to form a molecule with any other element other than itself. This means any impurities that adhere to a piece of gold in nature, can easily be melted away as slag, leaving behind a pure product that cannot be mimicked or disguised by another metal.
Gold is also very dense. When the Earth formed most of the gold simply sunk deep into the mantle, leaving behind trace amounts that can be found in certain key locations across the planet. It’s limited supply as thus kept it in high demand for much of human history.
It shows up in a wide range of industries and applications, including jewelry, art objects. Gold is also a good conductor of electricity and is found in small amounts in many electronic devices.
These factors have made it precious metal from the ancient past to today. It also helps to provide it with a relative amount of stability.
What Is Bitcoin?
Bitcoin is a form of cryptocurrency that emerged on the international marketplace early in 2009. It is the brainchild of a person or a group of people known only as Satoshi Nakamoto, who is believed to be a software engineer.
It is essentially a crowdsourced, digital form of currency. It involves individuals, known as miners, using open-source software to resolve advanced mathematical equations. It is also limited to 21 million bitcoins influences its value per unit.
Each bitcoin is then tracked by its transactions between different addresses. Each of which is made up of a series of randomly generated letters and numbers. To use a bitcoin the individual essentially purchases it with another encrypted series or numbers and letters that serve as a private and secret key that can be verified.
Understanding Bitcoins Value
On the surface bitcoin’s description can sound a bit archaic and complicated. So, let’s take a closer look at its underlying value and popularity.
Since it is essentially crowdsourced that value of bitcoin is directly linked to member participation in the system. Early on it generated a great deal of interest from individuals and organizations who wanted to make international transactions.
Since Bitcoin is encrypted and anonymous there have also been times when it attracted individuals who were interested in making discreet transaction that could not be tracked. Unfortunately, there have also been times when illegal enterprises have used it to make transactions and settle debts.
Changes in its popularity and use have had an impact on bitcoin’s value in recent years. This makes it arguably more volatile than gold.
Understanding The Risks And Rewards Of Investing In Gold Or Bitcoin
All commodities and currencies are subject to fluctuations based on changes in the international marketplace as well as the laws of supply and demand. As a new form of decentralized currency bitcoin has seen dramatic increases and decreases in its value based on its use as well as its popularity.
It’s also worth noting that gold has also seen some dramatic changes in its price per ounce during the same relative timespan. In the toughest days of the Great Recession it saw a significant increase in its value. In 2009 alone, the price of an ounce of gold increased by over 24% in response to stressed economic systems.
Gold’s value continued its historic rise to over $1900 an ounce in 2016. Yet, like all massive spikes in a commodity’s value, it’s price gradually fell back. As of the fourth quarter of 2018 it value sits at just over $1200 per ounce.
In contrast Bitcoin has displayed even more changes in its value during a similar timespan. Individuals who have elected to invest in bitcoin have worked hard to increase international supply of the cryptocurrency. Which has also driven developers to impose higher transaction fees.
From its inception in 2009 bitcoin’s value increased steadily to $1,242 in the fourth quarter of 2013. At that time gold was valued at around $1250 per ounce. This gradual, yet dramatic rise to rival gold also boosted bitcoin’s attention in the international media. During this time several websites made accommodations to facilitate bitcoin investment and attract bitcoin users. This of course attracted more new investors and miners.
Over time participation in the crowdsourced cryptocurrency started to wane, causing bitcoin’s value to decline. By the first quarter of 2016, bitcoin’s per unit value was estimated to be less than $400. It has since risen, fallen, and risen again, showing a great deal of volatility and instability, compared to gold. As of the fourth quarter of 2018 it is worth roughly $6,200.
On the one hand gold will always have value, for its intrinsic appeal in jewelry and art, as well as its potential use in electronics. This also means it will be relatively stable, and not likely to have the bottom drop out, while also not likely to see a massive overnight increase in value.
Bitcoin on the other hand has an undetermined floor yet a high and potentially volatile ceiling, which means it will always invoke the equation of measuring risk vs reward.