Gold versus Bitcoin: Differences & Similarities

March 6, 2024
6 min read
gold bars

Investors are always looking for the best investment for them. Due to the recent high inflation, it has become more important for many to invest in high-return assets. In this scenario, it's not just about growing your assets, but also protecting them.

One of the most intriguing comparisons is between gold and Bitcoin. Both are frequently held in a portfolio as an inflation hedge.

Gold's history

For thousands of years, gold has been considered a valuable commodity and a symbol of wealth and power. It also has a long history as an investment, in part because of its inherent value and limited supply. Gold plays an important role in the traditional financial system and has often been seen as a safe haven in times of economic turmoil and inflation since the late 1970s.

gold price
source: tradingeconomics.com

From 1944 to 1971, there was a global gold standard with the Bretton Woods system. Within this system, U.S. dollars were exchangeable for gold. Other countries' currencies had a fixed exchange rate against the dollar. This was eventually ended by Richard Nixon.

Although no longer in use, the gold standard remains an important fact in economic history. In addition, it contributed to the adoption of gold and the perception of gold as a safe haven.

The price of gold is related to the quantity of (new) gold. The stock-to-flow model, which can be used for multiple assets, describes the ratio of the current stock of a commodity and its new production.

A higher stock-to-flow ratio means the asset is scarcer. For gold, this ratio is high because little new gold is mined each year. This further contributes to the value of gold.

The rise of Bitcoin

Where gold has a colorful and long history, Bitcoin is fairly new. In 2009, Bitcoin was introduced as the first decentralized digital currency, along with its unique underlying blockchain technology. Since then, Bitcoin has seemed unstoppable. Whereas in the early days, it was mostly seen as a fun coin for computer geeks, today millions of individuals, companies, and institutions invest in Bitcoin.

In 2021, El Salvador became the first country to make Bitcoin legal tender. In early 2024, Bitcoin adoption gained further momentum as some spot ETFs were approved in the United States.

A stock-to-flow ratio can also be calculated for Bitcoin. Because the number of new bitcoins released per block halves roughly every four years during the halving, Bitcoin continues to become even scarcer, which again contributes to the price development.

The digital gold

Bitcoin is often referred to as the "digital gold." Besides the fact that both Bitcoin and gold are often held as hedges against inflation, they have other similarities, which will be discussed later in this article.

There are tens of thousands of different cryptocurrencies, but only Bitcoin is called digital gold. This is because most other crypto assets do not have the characteristics that make Bitcoin similar to gold. This is in part due to the underlying consensus mechanism.

We briefly explain the concepts of Proof of Stake (PoS) and Proof of Work (PoW), the two best-known consensus mechanisms.

  • Proof of Work (PoW): the mechanism behind Bitcoin. Later, some other cryptos also adopted PoW as their consensus model. With PoW, miners must solve complex mathematical problems to validate transactions and add new blocks to the blockchain. This is very secure and decentralized but requires a lot of computing power and electricity.
  • Proof of Stake (PoS): with PoS, on the other hand, there is no mining. Instead, new blocks are added to the blockchain by validators who "stake" their tokens to validate transactions. Validators are rewarded for this. PoS is generally more energy efficient than PoW.

With Bitcoin's PoW model, how much Bitcoin is rewarded for mining new blocks is programmed into the code. This amount decreases until one day it will be zero. A feature that most blockchains and crypto do not share with Bitcoin. So there are fundamental differences between for example Bitcoin, and the number two largest crypto, Ethereum.

Key differences between gold and Bitcoin

One of the most obvious differences between gold and Bitcoin is their physical versus digital nature. Gold is a tangible asset, while Bitcoin exists only in digital form.

Furthermore, Bitcoin has a lot more volatility than the price of gold. However, Bitcoin is more liquid and tradable 24/7. This makes it very easy to start investing in Bitcoin.

Similarities between gold and Bitcoin

Gold and Bitcoin share more properties than they differ. Both are considered hedges against inflation and are seen as assets that retain their value during periods of economic turmoil. Both Bitcoin and gold can be used as an alternative means of payment.

Surely the main similarity is in scarcity, which is largely where gold and Bitcoin derive their value from.

Furthermore, both are easily divisible (one does not have to buy one whole Bitcoin or a whole kilogram of gold), resistant to counterfeiting, and durable in the sense that they will not wear out or decay easily.

Both have a relatively high degree of decentralization, meaning that entities such as central banks and countries do not govern them or hold much power over them. If you own gold, it's yours. However, institutions do have more influence over gold than Bitcoin, which means that Bitcoin's decentralization is somewhat higher than that of gold.

TraitsGoldBitcoin
ScarcityScarceScarce
DecentralizationMediumHigh
PortabilityLowHigh
DivisibilityMediumHigh
DurabilityHighHigh
FungibilityMediumHigh
Counterfeit-resistantMediumHigh

Should I invest in gold or Bitcoin?

Bitcoin and gold have their unique characteristics and have advantages and disadvantages. Just like any other kind of asset. Whether one is a better investment than the other is not a simple question to answer. It depends on an investor's individual preferences, goals, and their risk appetite.

The most important thing as an investor is to always make an informed choice. Investing in one does not mean you cannot also invest in the other. A diverse portfolio could include multiple asset classes. Because of the growing popularity of Bitcoin, cryptocurrencies are now playing an important role in these diverse portfolios.

One does not have to put together these portfolios themselves. More and more investors are choosing to have a trusted expert invest on their behalf, such as with our crypto asset management.

The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.

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