Gold or Bitcoin

Hamburg, 27 March 2024 - In the realm of investment, Gold and Bitcoin stand tall, each representing a distinct store of value with its own fervent proponents. While gold has been cherished forbeing aphysical asset with intrinsic value, Bitcoin has emerged as a digital disruptor, captivating investors with its promise of decentralization and scarcity. As the world navigates economic uncertainties and seeks refuge from inflationary pressures, the debate between Bitcoin and gold intensifies, prompting investors to ponder which asset offers the superior hedge against financial turbulence. Some people refer to Bitcoin as the Digital Gold, but how accurately does this comparison reflect reality?

Gold

Gold, a precious metal, serves multiple financial purposes, functioning as an investment vehicle, hedge against inflation, store of value, medium of exchange, collateral for loans, and a reliable source of foreign exchange for central banks. Its liquidity during crises facilitates access to funds swiftly. Moreover, gold exhibits remarkable market resilience, consistently outperforming other assets and demonstrating robust performance even amidst market downturns.

Gold standard

In the past, many leading nations adopted the gold standard, which provided a framework for aligning their currencies with gold. This system facilitated the implementation of consistent interest rate policies, curbed inflation, and promoted exchange rate stability. Under the gold standard, the price levels of various currencies across countries moved closely in tandem. Gold coins, along with fiduciary currencies issued by central banks, government treasuries, and commercial banks, served as mediums of exchange in countries adhering to this standard.

Fiduciary currencies, such as banknotes, were not fully backed by gold but maintained ties to gold through various mechanisms. For instance, the Bank of England issued banknotes redeemable in specific amounts of gold upon demand, while the U.S. Treasury issued US notes and the Federal Reserve System issued Federal Reserve notes, both redeemable in gold. Similarly, Canada's Treasury issued Dominion notes redeemable in gold. The degree of linkage between fiduciary currencies and gold varied across countries, depending on legal convertibility and required gold backing. In countries like the USA, Canada, and England, issuers of fiduciary currency were obligated to redeem them in gold upon demand. In contrast, France allowed the monetary authority to decide the legal convertibility of fiduciary currency.

Different countries adopted fractional or 100% gold backing for their currencies. For instance, the Federal Reserve System in the USA was required to back Federal Reserve notes with 40% gold reserves. In the UK, notes issued up to a specific amount had no gold backing, while note issuance exceeding that threshold necessitated 100% gold backing.

Digital Gold Currency (DGC)

Digital Gold Currency (DGC) represents an electronic form of money, backed by gold reserves stored in vaults managed by private agencies. The first DGC, e-Gold, emerged in the 1990s, but faced regulatory hurdles when classified as a money transmitter by the U.S. Department of Justice, preventing it from obtaining operational licenses under this designation.

However, DGC is not without its drawbacks. Its lack of universal acceptance and inability to be managed by governments during crises are notable limitations. The independence of a gold-backed currency from national financial systems, coupled with its electronic nature managed by private entities, introduces inherent risks, including exposure to exchange rate fluctuations.

Despite these challenges, DGC offers certain advantages. It provides immunity to risks associated with a single national economy, enjoys widespread usage, and remains unaffected by political upheavals. Furthermore, it avoids entanglement with specific monetary policies, offering a degree of stability and autonomy.

Several DGC exchanges have failed due to various reasons, including regulatory constraints similar to those encountered by e-Gold, instances of embezzlement and money laundering by executives, and susceptibility to online identity theft.

Bitcoin

Bitcoin operates as a peer-to-peer network facilitating electronic cash transactions, renowned for its censorship resistance, portability, and potential as a store of value and hedge against economic unrest. Unlike physical assets such as fine wine, vintage cars, or high-end art, Bitcoin overcomes challenges related to storage, maintenance, and authentication due to its digital nature and existence on the blockchain, rendering it tamper-proof and immune to physical damage.

Moreover, Bitcoin's fungibility and divisibility ensure that one unit of Bitcoin equals another, regardless of location, making it an ideal medium of exchange and store of value. Transactions conducted with Bitcoin are transparently recorded on a public blockchain, ensuring easy verification.

Bitcoin's decentralized nature prevents any single entity from controlling or censoring transactions, fostering trust and security within the network. As a result, an increasing number of businesses, including online retailers, travel agencies, hotels, and restaurants, are integrating Bitcoin payment gateways, further legitimizing its role in mainstream commerce.

Gold vs Bitcoin

Gold and Bitcoin share some similarities but also exhibit distinct differences. Firstly, their regulatory frameworks differ significantly:

• Gold is widely accepted and subject to robust regulations, while Bitcoin lacks universal recognition and regulatory oversight, with regulations varying across countries.
• In terms of utility, gold boasts versatility as a currency and raw material for various industries like jewelry, electronics, and dentistry. Conversely, Bitcoin's utility primarily lies in its potential as a currency (pending widespread acceptance) and its application in decentralized finance, lacking non-financial utility.
• Liquidity sets them apart as well. Gold tends to be more liquid, whereas Bitcoin liquidity can be limited, with exchanges imposing daily liquidation caps, such as Coinbase' s $50,000 limit.
• Both assets serve as inflation hedges, but Bitcoin's volatility renders it a riskier investment compared to gold.
• Scarcity also distinguishes them. Bitcoin's limited supply of 21 million, with 19 million already in circulation, contrasts with gold's ongoing production, albeit potentially unsustainable due to diminishing mining returns.
• Regarding transactions, Bitcoin offers greater convenience due to its digital nature, particularly for large transactions, whereas gold's physicality can pose logistical challenges.
• Lastly, while gold boasts centuries of history, Bitcoin is a relatively new technology.

coinIX and Bitcoin

The recovery of the Bitcoin price and the approval of Bitcoin ETFs greatly help to alleviate the reservations that still exist in the financial sector regarding crypto and blockchain. Anyone arguing that Bitcoin has no intrinsic value, needs to recognize that the value of an object is determined by supply and demand, not by its properties. The possibility embodied by Bitcoin that units of value can be transferred quickly, securely, and transparently from one wallet to another without the need for an intermediary or even a human has tremendous potential. Bitcoin is also a part of the coinIX portfolio. Hence, our portfolio's value thrives on the positive bitcoin news.

Conclusion

The debate between Bitcoin and Gold as a store of value is multifaceted. Both assets have their strengths and weaknesses, with Bitcoin representing the innovative frontier of digital currency and Gold embodying the timeless allure of tangible wealth. Deciding between them ultimately hinges on your risk tolerance and willingness to embrace new technologies. Whether you opt for the solidity of Gold or the potential of Bitcoin, both can serve as viable options for safeguarding wealth in an ever-evolving financial landscape.

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