Think Twice Before Comparing Bitcoin to Gold

This article was originally published on ETFTrends.com.

Bitcoin, the largest of the digital currencies, has frequently been compared to gold, but some market observers believe investors should dig deeper on that comparison.

Bitcoin is a decentralized digital currency, or cryptocurrency, based on a peer-to-peer network and can be exchanged through computers internationally without a financial intermediary. The system was first introduced by an unidentified programmer or group under the name of Satoshi Nakamoto in 2009.

While bitcoin's popularity has swelled in recent years, it still is not as widely accepted as traditional currencies. Conversely, gold has been viewed as an adequate replacement for traditional currencies for thousands of years.

“Bitcoin was the first cryptocurrency developed, and it only emerged on the scene as recently as 2009. Until bitcoin has demonstrated over time that it can effectively transfer and preserve wealth, I don’t think it’s responsible to call it Gold 2.0,” said George Milling-Stanley, Head of Gold Strategy at State Street Global Advisors (SSgA), in a recent note.

Gold is also now competing with digital currencies, such as bitcoin, but the World Gold Council reminds investors that gold is very different from cryptocurrencies since the physical precious metal is less volatile, has a more liquid market, trades in an established regulatory framework, has a well understood role in an investment portfolio and has little overlap with cryptocurrencies on many sources of demand and supply. The yellow metal is also an important portfolio diversifier when traditional assets slump.

There are some similarities between gold and bitcoin.

“The other similarity is scarce supply. Bitcoin is engineered to slowly decline to zero growth around the year 2140, where it will reach maximum capacity of 21 million digital coins,” said Milling-Stanley. “Gold doesn’t have a set date or maximum capacity, but on average approximately 3,200 tonnes of gold have been mined every year, adding about 1.7% of the total stock of gold ever mined.”

After bitcoin, the largest cryptocurrencies are Ethereum, Ripple, Bitcoin Cash and Litecoin.

Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs this year.

For more information on the cryptocurrency, visit our Bitcoin category.