Gold has long been a preferred currency for investors, with part of its appeal stemming from it physicality. Bitcoin, on the other hand, is a new currency option that is notable for its intangibility — the cryptocurrency exists solely on the internet.
And so, how might these radically different currencies intersect? MarketWatch columnist David Weidner proposes that they are in direct competition to be the currency that investors turn to in times of economic instability.
Gold and bitcoin function similarly during periods of instability
Despite some key differences, gold and bitcoin function similarly. For instance, gold has historically been seen as a stable investment for those lacking faith in their country’s banks, government and currency. Likewise, bitcoin is famous for being a borderless, decentralized currency independent of such institutions.
Because of their independence from national currencies, both gold and bitcoin are seen as desirable investments during times of economic and political instability. However, they are desirable for different reasons — gold is thought to retain its value during times of turmoil, while limitations on bitcoin supply make the currency appealing.
In terms of how bitcoin supply works, bitcoins are “mined” using a distributed consensus system that confirms previous purchases by logging them in a shared public ledger called the blockchain. Essentially, the process controls the number of bitcoins that are available at one time. Furthermore, according to Bitcoin.org, the number of new bitcoins created each year is halved until it reaches the maximum of 21 million bitcoins in existence. In theory, this limited supply will help the currency maintain its value, rendering it appealing during periods of national economic insatiability.
The recent increase in bitcoin merchants in Argentina reflects this trend. The Financial Timesreported that the number of bitcoin merchants in Argentina has doubled in the last year, demonstrating the highest bitcoin adoption rate in Latin America. Bitcoin Magazine states that this increase is due to the country’s “overvaluation of exchange rates, unstable inflation and complicated economic dynamics.” Merchants’ decision turn to bitcoin to avoid the volatility of the Argentinian peso recalls the rapid investment in gold during the 2008 financial crisis.
Fluctuating value: what is a bitcoin worth?
As can be seen, both gold and bitcoin theoretically have the potential to be stable monetary standards that function independently of instability worldwide. And in Weidner’s opinion, though gold has a long history — and tangibility — behind it, it’s not necessarily the better option.
All in all, he believes that if gold doesn’t offer more stability, then there is no difference between it and the entirely internet-based bitcoin. The two currencies are therefore in direct competition, suggesting that bitcoin’s worth is directly tied to gold investing. Ultimately, it remains to be seen whether investors will turn to the Earth or the internet as a store of wealth in future periods of economic certainty.
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This article was originally published on July 22, 2015 on Technology Investing News.
Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.
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