June 3, 2021

Gold vs Crypto currencies: Fundamental Differences

Over the last decade in particular, various crypto currencies like Bitcoin have captured the imagination of investors all over the world. Crypto currencies themselves are digital forms of currency in which transactions are both verified and maintained in a decentralized system called the blockchain. Security is maintained using cryptography, as opposed to some type of centralized authority like a bank.

While all of this is certainly innovative and exciting, it does not mean that crypto currencies are positioned to become a viable alternative to gold. Far from it, in fact, as there are certain fundamental differences between gold and crypto currencies that you need to be aware of.

Part 2 of 3: The Fundamentals

One of the biggest differences between gold investments and crypto currencies is that gold actually has a dual nature. For thousands of years, gold has acted as a means of exchange and has also been used as a store of value. But in terms of demand, it also plays other important roles in our society too. A significant portion of the gold demand is connected to various cultural and religious beliefs around the world, for example. This is especially true in terms of places like India and China. At the same time, gold is also commonly used in high-end electronics and tools used in a wide range of industries' from nano technology in medicine to astronaut helmets! It's also an invaluable part of computers, mobile phones and just about every other piece of technology you can think of.

It's this dual nature - it's ability to be used as a store of value and its other roles throughout our lives - that allows it to perform exceptionally well in times of economic stress.

Crypto currencies, on the other hand, are digital and non-tangible assets. Their only source of demand is for investment, which is why you're seeing a situation where Bitcoin in particular is becoming famous for volatile behavior.

                                                                                                                 Bitcoin price fell 35% since May 8, 2021

It's also important to consider the fact that gold is a unique and scarce natural element, which only contributes to its value over the long-term. Gold's relevance has been firmly cemented through a combination of both its elemental physical and chemical properties, along with a solid balance between its availability and its scarcity. While it's certainly true that there are other precious metals out there like silver or platinum, gold was the preferred asset to use in the currency standards for this reason alone.

To put that into perspective, there is nothing that will prevent newer - and maybe even more efficient - crypto currencies from replacing the ones that currently exist right now. Likewise, even though Bitcoin is designed to slowly decline to zero growth right around the year 2140, that isn't exactly written in stone. It's not out of the question to think that one day miners may add to the overall total supply, which would create even more volatile behavior as existing Bitcoins are devalued.

But maybe the biggest difference between gold and crypto currencies is that gold production and ownership is diverse. Gold mining happens all over the world and places like China, Russia, Australia, the United States and Canada are among the chief producers. The number of Bitcoin miners, on the other hand, is at this point made up of only a few entities - all of which are based in China.

In the end, while it's certainly safe to say that crypto currencies have been a major source of excitement for the investment world, they're unlikely to replace gold in importance and prominence for many of the reasons outlined above.