What are the differences between bitcoin, gold and fiat? (And their pros and cons.)
Some assets are here with us for the long term, and that’s why they are more trusted and valued in difficult times. This can be applied to gold. On the other hand, we have modern technologies that are supposed to substitute conservative ways of payment, such as bitcoin.
This article breaks down different traits of money between three assets: bitcoin, gold and fiat. So, if you are about to invest or trade with any of the above-mentioned, this summary can influence your decision-making. And on top, we are also covering the pros and cons of bitcoin to understand a relatively new payment instrument better. Besides that, we pay attention to the advantages and disadvantages of gold and fiat, which can help you better orientate in these three assets.
Bitcoin is a decentralized digital currency with a fixed finite amount that can be circulated. Transactions happen in an online environment called a blockchain network, meaning it is necessary to have a connection to the Internet. Some people consider it an alternative to fiat money, especially those who cherish a limited state control over money. It is a currency backed by trust in mathematics and a precisely defined algorithm; unlike bitcoins, standard money is backed by trust in the state, its bodies, institutions, and banks.
Advantages of Bitcoin:
- Fast and cheap payment – after making a payment to the selected address, the transaction network confirms everything within a few minutes, up to tens of minutes. Additionally, blockchain is available 24/7.
- The possibility of immediate electronic transfer of purchasing power around the world.
- Non-physicality – bitcoin is not located in any specific country but on the Internet, and its copies are on tens of thousands of hard drives in more than 150 countries of the world.
- Resistance to taxation and confiscation by the state.
- User anonymity and transparency.
Disadvantages of Bitcoin:
- The necessary presence of the Internet.
- The possibility of losing or stealing Bitcoin – this can happen if you forget your password, lose your private key or lose your entire Bitcoin wallet.
- High volatility – You may experience sharp price swings with this cryptocurrency. On the other hand, this could be an advantage, as at the “right” time you can profit.
- Bitcoin is associated with illegal practices, e.g., purchasing prohibited items on the dark web.
- It is not regulated, and that’s why Bitcoin can be full of scams.
- Political and higher interests – the state can restrict the use of cryptocurrencies by law, as it does not have arbitrary control over the circulation (for example, Algeria prohibits the use of cryptocurrency).
- Bitcoin has limited uses – not every organization or individual accepts payments in cryptocurrency.
Due to a stable and slow growing/limited supply in a faster-growing economy, gold has maintained a high value over the centuries.
This precious metal appears to be the most-trusted commodity during the wartimes. Many people prefer to invest in gold in the form of its physical possession, e.g. gold bars, ingots, jewellery, or collector coins. Still, there is also the possibility of holding paper gold (for example, shares of gold miners).
Advantages of gold:
- Well-trusted commodity – more than 5,000 years of history in the role of money.
- Worldwide acceptance and high liquidity.
- Insurance against the state’s failures and its insolvency.
- During the war, it always proved to be a generally acceptable means of exchange.
- Enables anonymous payments, savings and value transfer.
- High-value density – high value can be hidden and moved in a small volume.
Disadvantages of gold:
- Higher transaction costs than the money itself in the form of risks of physical storage and transmission, absence of general acceptance and the need to verify the integrity and weight of transactions.
- The physical form of gold makes it impossible to transfer by electronic means.
- Short-term and medium-term volatility against the unit of account (euro, dollar, yuan, …), can lead to losses in the case of a one-time purchase and a short holding period.
- Possible state taxation or expropriation.
A government backs fiat money as the circulating supply depends on the decision-making of authorities (e.g. Ministry of Finance, FED). The best examples are paper money or coins issued by a government, such as the national currencies of countries, e.g. US dollar, the British pound, Euro. Since they are not backed by any commodity, there is a real danger that they will become worthless due to hyperinflation. Their value is derived from the market’s forces of supply and demand based on people’s trust. With the intervention of governments and central banks, FIAT money is characterized by stability.
Advantages of fiat currency:
- Economic stability – countries can react more flexibly in the event of economic changes or on the brink of a financial crisis.
- Fiat is not limited by a lack of a physical commodity (such as a limited supply of gold or the amount of Bitcoin mined).
- Growth potential – the government can increase the supply of fiat money simply by printing new notes, thereby stimulating economic growth.
- Greater affordability than commodity money.
- Convenient to use – it is easy to carry around or exchange for any other value available for trading (besides that, most people think and calculate in dollars).
Disadvantages of fiat currency:
- Inflation – since the government can easily print new notes, fiat currency is likely to suffer from (hyper)inflation and economic bubbles.
- Government-bound value – reliance on government stability. The worst scenario is that the value of the fiat currency may collapse as people lose their trust in the fiat as a means of exchange.
- Limited privacy – the government can quickly identify and track who is spending money, when and for what purpose.
Due to the high density of information, it is not possible to cover these assets and their aspects completely, but we can provide you with the infographic below.
You should monitor all the mentioned financial instruments because they are used to exchange values.
Gold has a long history and has limited quantities (it cannot be produced additionally). Therefore, its value is higher, and its price is more stable.
FIAT is a generally recognized form of payment that is internationally accepted across all countries. As it is centrally controlled, some regulations can affect the economy.
Bitcoin is the newest financial instrument, similar to gold – it is also limited in quantity, but unlike gold, it exists in the virtual world, not the physical one. Therefore, the costs of its storage or physical transfer are eliminated.
Each of these means has its pros and cons. When using them, you must take into account your goals and the current economic situation.
And that’s it. Thanks to this understandable overview and comparison, it will be easier for you to focus on the assets that are relevant to you and your investment/trading strategy.
Just reassure that your portfolio is highly diversified to prevent unwanted losses from investing, trading, or asset handling.