In the face of a declining stock market, even savvy investors might find themselves in a dilemma. And when you have to choose between two strong contenders, making investment decisions can prove to be quite challenging!

Yes, we’re talking about Bitcoin and gold; while one is the world’s most popular and polarizing cryptocurrency, the other has held our interest for thousands of years!

A tried and tested method is to hedge against stock volatility by investing in gold. The precious metal is well capable of softening the blow in the event of a stock market decline. Bitcoin, hailed as the gold standard of the digital age, is still an experimental technology. Despite this, those backing this currency have a strong belief that Bitcoin could unseat gold in the long run.

No matter which side you’re on, don’t invest your hard-earned money anywhere based on what others have to say. Read on for a comparative analysis of Bitcoin and gold, and take an informed decision!

The Basics

In the simplest of terms, Bitcoin is a type of virtual currency or reference to the technology and network that enables this currency to be stored and moved around. This virtual money system was proposed in 2008 and made public in less than a year.

Each Bitcoin unit is like an entry on a digital ledger. This public ledger, or block chain, is maintained and updated by users of Bitcoin, in line with rules established by the software. Bitcoin prices are set on market exchanges, similarly to that of stocks, and people can offer to buy or sell bitcoins.

Since there is no central authority, no one can demand personal information from users or shut down accounts. This sets Bitcoin apart from other currencies.

On the contrary, gold has been the world’s currency of choice from ancient civilizations! Many investors purchase gold as a hedge against inflation and political unrest. Investing in gold is also a recommended way to lower overall portfolio risk.

There are several opportunities for investing in gold - bullion or gold bars, coins, EFTs and mutual funds, futures and options, and mining companies. Jewelry ownership is an enjoyable way to own gold, but if buying online, it’s suggested to make purchases from trusted websites like BlueStone.

Mining

Bitcoins are different from paper money in that the government doesn’t decide when to print and distribute them. Users engage in bitcoin mining - a process in which they compile recent transactions into blocks and solve computationally difficult puzzles. The user that is able to solve the puzzle first, gets to claim rewards in the form of transaction fees and newly released bitcoins, which can be divided and distributed to other users.

In this way, new bitcoins will keep on releasing at a steady pace until there are 21 million of them. However, this is scheduled to happen in 2140!

Note that in the case of gold, mining simply ceases until demand increases. On the other hand, when bitcoin price falls, mining difficulty diminishes automatically. So supply is constantly increasing irrespective of demand. Gold doesn’t see a constant downward pressure; since supply adjusts to demand, purchasing power fluctuations are less severe than those experienced by Bitcoin.

Value

Bitcoin is referred to as ‘digital gold’ given its weak relationship with other assets. As mentioned, bitcoins cannot be mined for eternity, so when the supply runs out, they could have a high price ceiling, perhaps even higher than gold! This remains an important catalyst for the speculative bubble.

That being said, the applications of Bitcoin aren’t very clear. While it serves as a digital instrument of value transferability and speculation, Bitcoin has limited utility as currency. Also, Bitcoin is a faith-based currency. This means that popularity makes it price-positive, but there could be adverse consequences if the currency loses support.

Gold not only possesses ideal chemical properties to serve as currency and a store of value, but also has a timeless appeal. It has a long-term value with no counterparty risk, meaning if you have gold in your possession, it is bound to retain its value regardless of the other party making good their end of the deal.

Gold has high liquidity- it’s easily convertible to cash. Most importantly, gold has intrinsic value and is value dense. Unlike diamonds, splitting up gold doesn’t change its value. This precious metal cannot be counterfeited or inflated either!

Security

Bear in mind that Bitcoin software is open source. Though the software has been tested well, there’s no guarantee of it being flawless. With developers updating the software periodically, the possibility of vulnerabilities being introduced increases.

While large scale hacks have marred Bitcoin’s image and slowed down its rise, thefts have mostly been the result of carelessness and incompetency on the part of Bitcoin users, not fundamental flaws. For users who are careful and well aware of how Bitcoin works, the decentralized nature of this technology can provide a very high level of security.

Another interesting thing to note is that high-profile thefts have occurred at exchanges with centralized wallets that stored bitcoins owned by thousands of users. Private wallets do not carry any information pertaining to owner identity, making it really hard for crooks to target them.

The original decentralized asset - gold - held in personal possession offers the highest degree of privacy and confidentiality.

Other Risks

Bitcoin faces social risks in that individuals might gossip about the technology or enter the system without having the knowledge required to use it right. As discussed earlier, Bitcoin does need user faith to be as popular as it is right now!

Moving on, the technology opposes conventional norms and can face opposition or restrictions by the government. It might also be a possibility that regulatory bodies enforce laws related to customer protection, financial and operational breaches, security, etc. Since Bitcoin is essentially technology, there are real risks attached to network, network equipment, system vulnerabilities, and more.

Bitcoin has also been known for its price volatility with enormous gains and rapid falls. Only time will tell whether the technology is revolutionizing money or going through creative destruction!

Gold prices are volatile too, so you can’t say for sure how much appreciation your gold might potentially have. Gold bars and coins come at premium prices and it can be a hassle to store them safely.

Final Thoughts

Bitcoin has certainly seen a promising start and the immediate future looks impressive for this technology. Nevertheless, there are quite some risks associated to this decentralized asset.

Gold, with almost no co-relation to stock indices and currencies, remains a strong safe-haven. With an established system for weighing, trading and tracking, it is certainly hard to counterfeit gold or corrupt it. An encrypted system and complex algorithms offer their share of security to Bitcoin, but traders need to remain vigilant until better safety-ensuring infrastructure is put into place.