Bitcoin Gold: Worthy Investment Or Risky Business?

Bitcoin and gold are two very different investments, and the right choice depends on your risk tolerance, investment goals, and preferences. Gold is a traditional investment that has been trusted for centuries as a safe haven in times of economic crisis and a hedge against inflation. On the other hand, Bitcoin is a decentralized digital currency that operates independently of central banks and has seen huge returns in a short period. Gold is better for wealth preservation, while Bitcoin is better for investors seeking high returns and willing to take on high risks.

Bitcoin's finite supply

Bitcoin has a finite supply, with a maximum of 21 million bitcoins able to be minted. This is because Bitcoin inventor Satoshi Nakamoto designed the cryptocurrency with a cap to limit the supply, increasing its scarcity over time and, in turn, increasing demand and price.

Bitcoin is similar to gold in that it has a finite supply built into its source code. However, unlike gold, Bitcoin cannot be created out of the blue and takes computational mining to extract.

The final bitcoin is not expected to be generated until 2140, and it is likely that the number of bitcoins in circulation will remain substantially below 21 million. This is because Bitcoin holders can lose access to their bitcoins, for example, by losing the private keys to their Bitcoin wallets or passing away without sharing their wallet details. A June 2020 study by the crypto forensics firm Chainalysis estimated that up to 20% of the Bitcoin already issued may be permanently lost.

After the maximum number of bitcoins is reached, no new bitcoins will be issued. This will likely affect Bitcoin miners, but how they are impacted depends on how Bitcoin evolves as a cryptocurrency.

Volatility

Bitcoin is known for its price volatility, and this volatility is not inherent to gold, making gold perhaps a safer asset. Movements of 1-2% in the precious metals markets raise eyebrows, but it's not uncommon for Bitcoin to move 10% in a single day. Several major crashes have occurred in the decade or so since Bitcoin launched, often lasting years.

Bitcoin's volatility is a double-edged sword. The same volatility that causes Bitcoin to lose three-quarters of its value every few years is the same volatility that helped propel it to become the best-performing asset of the century. There is clear data proving that Bitcoin's volatility is diminishing as the asset class matures. When zooming out, Bitcoin's volatility is actually a feature. For investors with the goal of investing over years and decades, not months, few better options boast as impressive a track record and hold as much long-term potential as Bitcoin.

Bitcoin's use case as a store of value is controversial due to the price volatility. However, on a long-term scale, Bitcoin has usually proven to be a very lucrative investment. Analysts have listed Bitcoin as the best-performing asset class of 2019, with 60% growth in less than two months. The inclusion of a moderate Bitcoin investment in a diverse portfolio has also been shown to increase the Sharpe ratio of that portfolio and actually reduce volatility.

Bitcoin has historically proven to be subject to the media effect, investor sentiment, regulatory actions, and hype. News from the digital currency sphere could prompt investors to panic and make quick decisions, quickly sending Bitcoin's price upward or downward.

Liquidity

Gold is a highly liquid asset. It is traded in a well-established and liquid market, with gold trading volumes exceeding US$180 billion a day on average in 2020. This market liquidity helps investors manage risk by providing the ability to easily enter or exit their gold positions.

Bitcoin, on the other hand, has lower liquidity. Its spot trading volumes were estimated to be less than US$2 billion on average in 2020, with a range up to US$4 billion. The number of Bitcoin transactions relative to its market cap has decreased, indicating potential liquidity concerns if many investors attempt to exit the market simultaneously.

The liquidity of Bitcoin also depends on the platform used for trading. For example, exchanges such as Coinbase impose daily limits on cryptocurrency liquidation, which can hinder investors from quickly moving in and out of the asset.

While Bitcoin is generally a liquid asset due to its higher trading volumes and market capitalisation, its liquidity is lower compared to gold. Therefore, if you prioritise liquidity in your investments, gold might be a more suitable option.

Safety and security

Bitcoin Gold is an open-source cryptocurrency created in 2017 as a "hard fork" of the original Bitcoin blockchain. It was designed to address issues with the original Bitcoin blockchain code, such as the centralization of mining power and the increasing difficulty of Bitcoin mining. While Bitcoin Gold shares similarities with Bitcoin, it has some distinct features that set it apart in terms of safety and security.

Decentralization and Security:

Bitcoin Gold operates on a decentralized blockchain network maintained by computers worldwide. This decentralization is a key advantage as it ensures that no single person, entity, or group can control or manipulate the network. Investors can have confidence in the security of their investments, as the network is incredibly challenging to breach. In contrast, physical gold storage requires secure vaults or safes, and there is always a risk of theft or loss.

Mining Accessibility:

Bitcoin Gold utilizes a different mining algorithm, making it more accessible to individual miners. The original Bitcoin mining environment is often dominated by large "farms" of machines, which can centralize mining power. By using a different algorithm, Bitcoin Gold encourages a more distributed mining process, reducing the risk of centralized control.

Transaction Security:

Bitcoin transactions are protected by cryptographic codes, which are extremely difficult to break. However, it is important to note that Bitcoin itself is not insurable as it is not a tangible asset. The security of Bitcoin transactions depends on the strength of the cryptographic codes and the physical security measures taken by users to protect their devices and wallets.

Regulation and Consumer Safety:

Bitcoin is not regulated by a central authority, which gives it agility and flexibility. However, this lack of regulatory oversight also creates consumer safety concerns. Bitcoin scams are relatively common, and defrauded victims may have limited recourse. In contrast, gold is heavily regulated, and fraud is less likely on established gold exchanges.

Taxation:

Bitcoin is subject to taxation, and each sale is taxed as a short-term or long-term capital gain. While this allows for rapid transactions and daily profit-taking, investors should be aware of the tax implications. Gold, on the other hand, has different tax treatments depending on the holding period. In the US, gold sold within one year of purchase is taxed as regular income, while gold held for over a year is subject to capital gains tax, generally at a lower rate.

In conclusion, while both Bitcoin Gold and physical gold have their safety and security considerations, Bitcoin Gold offers advantages in terms of decentralization, transaction security, and mining accessibility. However, the lack of central regulation in Bitcoin can create consumer safety concerns, and the absence of insurance for Bitcoin as a non-tangible asset is a factor to consider. Ultimately, investors should carefully weigh the benefits and risks of each investment option and conduct thorough research before making any decisions.

Long-term potential

Bitcoin Gold is a cryptocurrency that is an offshoot of the more widely known Bitcoin. It was created in 2017 as a hard fork of the original Bitcoin blockchain. Bitcoin Gold functions similarly to Bitcoin, but with some key differences. One of the main differences is that Bitcoin Gold changed the mining algorithm to prevent the use of specialized mining equipment, allowing more people to mine the currency with consumer-grade hardware.

As an investment, Bitcoin Gold has some potential advantages. Firstly, it is a decentralized digital currency that operates independently of central banks and is powered by blockchain technology. This means that it is not subject to the same level of government regulation as traditional currencies, which may appeal to investors who are concerned about government interference in the financial markets. Additionally, Bitcoin Gold is purely digital, making transactions fast and straightforward. This can be advantageous for investors who value speed and convenience.

Another potential advantage of investing in Bitcoin Gold is the possibility of generating large returns quickly. Bitcoin Gold, like other cryptocurrencies, has the potential for significant price increases in a short period. For example, the value of Bitcoin increased dramatically between 2019 and 2021, reaching a peak of over $60,000. This volatility can cut both ways, however, as Bitcoin has also experienced sharp declines in value, so investors should be cautious and understand the risks involved.

One of the key considerations when investing in any cryptocurrency, including Bitcoin Gold, is the level of risk involved. Cryptocurrencies are generally considered high-risk, high-return investments. They are subject to significant price swings and can be difficult to predict. Additionally, the lack of regulation in the cryptocurrency market makes it ripe for scams and fraud. It is also important to note that Bitcoin Gold is a relatively new currency, and its long-term potential is still uncertain.

When considering investing in Bitcoin Gold, it is essential to weigh the potential benefits against the risks. For investors who are comfortable with a high level of risk and are seeking the potential for large returns, Bitcoin Gold may be a worthwhile investment. However, for those who prioritize stability and security, more traditional investments such as gold or stocks may be a better choice. Ultimately, the decision to invest in Bitcoin Gold depends on your individual risk tolerance, investment goals, and preferences.

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