Is bitcoin now as good as gold?

Gold has long been seen by many investors a hedge against economic disaster. Bitcoins offer many of the same properties, but which is better?

By MSN Money Partner Mar 19, 2014 6:10PM

Pile of bitcoins. (C) Lusky/Getty ImagesBy Christopher Matthews for Fortune

 

Call it a battle of the doomsayers.

 

In some corners of the Internet -- where topics such as the collapse of the global monetaryFortune on MSN Money system or runaway inflation are the stuff of common, and lively, conversation -- one question in particular elicits particularly heightened emotions: is bitcoin as good as gold?

 

Since the fall of the Bretton Woods monetary regime in 1971 and the double-digit inflation that followed, investors have considered gold a hedge against inflation and a check against central banks who have the capacity to resort to money printing and currency devaluation as a means of decreasing the burden of public debt and encouraging export growth.

 

But while gold often thrives in inflationary environments, it's really a bet against something far worse than inflation. After all, run-of-the-mill stocks, real estate, or even inflation-protected government bonds can protect you against against a decline in the real value of government-issued currencies. But for many investors all over the world, gold is a great protector against much more severe events than 1970s-style inflation, like war or prolonged depression.

 

Now that bitcoin has grown closer to the mainstream, though, and offers many of the same qualities that gold does -- like scarcity and freedom from the influence of government -- which is better at protecting investors against the very worst?

 

As a store of value

The total number of bitcoins that can be mined has been preset at 21 million, whereas the amount of gold that can be mined is a more complicated question. Over time, the increase in the supply of gold has increased at roughly 1-3% per year, but on a short-term basis there can conceivably be a lot of volatility in the price of gold due to new discoveries. Of course, as a new technology, bitcoin is subject to much more volatility than gold. But over the long run, given the fact that no new bitcoins will be mined after the 21-millionth, we can expect it to ultimately serve as a better store of value than gold.

 

Advantage: bitcoin

 

Confiscatory risk

In the event of widespread social upheaval or depression, the risk that governments will confiscate private assets is quite real. In fact, in 1933 and 1934 the United States government made it illegal to privately own gold and confiscated it, first by executive order, then by Congressional decree. Gold holders were compensated for their assets, but the whole point of the exercise was to to devalue the dollar in gold terms, so those reimbursed weren't receiving the real market value for their assets.

 

If something like this were to happen again, would you be safer holding gold or bitcoin? In one sense, it doesn't really matter. If the government wanted to take your gold or your bitcoins, and you resisted, you'd be a lawbreaker in any case. But if you're determined to thwart the government, it's probably a bit easier to do it with gold than with bitcoin. Sure, there are ways to buy bitcoin so that your identity is not traceable via the bitcoin blockchain, but it's more complicated than buying small amounts of gold with cash at a coin show and not reporting it to the government.

 

Disclaimer: obviously, breaking the law is breaking the law and that's not advisable, even in some of these worst-case, hypothetical scenarios.

 

Advantage: gold

 

Hedge against the absolute worst

If the prospect of World War III is keeping you up at night, it's difficult to imagine bitcoin as a better bet than than gold. After all, bitcoin relies on the Internet to be functional, and if you are somehow severed from the power grid or the online community, your bitcoins will be worthless, even if you store them in physical form.

 

Advantage: gold

 

Ease of use

Bitcoin is likely more useful in less dire situations, like if you're a citizen of a country with a repressive or irresponsible government but you still have regular access to the Internet.

 

Bitcoin has surged in popularity in places like Argentina, for instance, precisely because the currency there has been mismanaged and the Argentine economy suffers from chronic inflation. In a situation such as this, bitcoin is a better alternative than gold because owning real, physical gold is expensive to store and transport, while spending and storing bitcoin is effectively costless.

 

Advantage: bitcoin

 

And the winner?

As you can see, it's difficult to declare a clear winner in this hard-money rumble. Much of gold and bitcoin's value is speculative, based on investors' predictions about how political events are likely to unfold. And politics is even harder to predict than profits, which is why so many mainstream economists and financial advisors recommend that you keep only a very small portion of your wealth in alternative investments like gold and bitcoin.

 

This, of course, isn't to say that gold and bitcoin are worthless; just that their worth is highly unpredictable. Gold, for instance, could soar in value if there is a successful political movement to restore its place in the global monetary system. This isn't an entirely crazy notion, as the dollar-denominated world of floating exchange rates has led to instability in emerging markets and imbalances in global trade.

 

The same goes for bitcoin. If it can become widespread enough such that governments accept it and even incorporate it into their legal frameworks, the $600 or so that bitcoin is going for now might seem cheap.

 

More at Fortune.com:

 

165Comments
Mar 19, 2014 7:21PM
Mar 19, 2014 7:54PM
Mar 19, 2014 9:45PM
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Gold will never be worthless, it has a use in manufacturing. Bitcoins can lose everything with one good EMP from a solar flare.
Mar 19, 2014 9:47PM
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Flat out...the authors of this article should just be jailed.....shame on all of you unscrupulous con men.  You are the absolute scum of the earth for putting this garbage out there.  I hope you get fired asap! 
Mar 19, 2014 10:32PM
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Bitcoin , just another name for unbacked , uninsured , unpopular (with most people)  currency which can suddenly just disappear , like a few weeks ago . Monopoly anyone ? I will sell you Park Place and Boardwalk for 200 bitcoins , ok ? SMH  
Mar 19, 2014 10:09PM
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Bit coin is worthless. Hey I got tulip bulbs I am selling for only $500 a piece.
Mar 20, 2014 8:48AM
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this bitcoin thing is nothing but a scam I cant believe so many people are that stupid
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From all the articles I have read, Bitcoin is as secure as the web.
Mar 19, 2014 10:13PM
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The one thing the authors of this article did get right, is if the government does try to confiscate gold and silver, what do you want to bet that the outcome would be FAR DIFFERENT from what the government thinks would happen?

One scenario, unless you're REALLY naïve, you have physical possession of your gold and silver, and VERY FEW people know you have it. So I'll bet 90% of gold and silver coins will go underground, and the government gets NOTHING!!! Which is as it SHOULD be.

Another scenario, this idiotic move [confiscation] by a greedy, out of control government kicks off a second American revolution. And considering how a LOT of states feel about the idiots in DC, this scenario seems a little bit more likely than the first.


Now as for Bitcoin, I happen to think it's not a bad idea. Except for ONE thing. If it's on the internet, the government can get it GREEDY hands on it, because MOST transactions are traceable, whereas, buying gold and silver coins physically DOES NOT have to be, and is pretty hard to trace, as long as YOU USE CASH.

Mar 19, 2014 10:49PM
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You really have to be shidtting me .....right??
Mar 23, 2014 11:06AM
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Hahahahahaha,  Bit coin is the "Beanie Baby" of money.


Mar 20, 2014 2:23AM
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Choosing between gold and bitcoin? Gold.  
At least its a tangible in your hand thing that could be bartered or exchanged much easier accepted by large and small  suppliers. Gold be be done privately for quiet purchases or publicly for public records to ensure legalities have been followed. 
Bitcoin is on the internet require access to communication lines to gain real access from it, even those code in a plastic shaped coin are worthless until you can prove their legitimate by getting access to the internet. Not very many suppliers accept bitcoin. 
Both can be taken away by government or businesses of exchange or supplier mismanagement or fraud.
Mar 23, 2014 8:28AM
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I don't get the whole bitcoin phenomenon. Where did they come from? What backs them? If they are backed by money, they will be as useless as the currency when the currency crashes. Especially if the crashed currency is the US dollar.

 

The media can stop talking about bitcoins now. To me, it sounds like some junk bond scam. I would not invest a nickel into that garbage, but I would buy gold regardless of any nonsense about the government being able to confiscate it. They can confiscate something that they do not know I have? Do they assume everyone is now a good lemming and will do whatever the government tells them to do?

 

If the government confiscates private gold holdings, you have a lot more to worry about that whether you should have bought bitcoins or gold. It will mean our currency has crashed and the game is over. At that point you'd be better equipped if you owned some guns, ammo and enough soil to plant yourself some food.

Mar 23, 2014 9:44AM
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Bitcoin. Fake money, and death, hand in hand. Look what happens to a Bitcoin trader overseas.


"Singapore police probe 'unnatural' death of American CEO of bitcoin trader.


 Singapore police are investigating what they have called the "unnatural" death of a 28-year-old American woman who ran a small exchange that traded virtual currencies, including bitcoins, from the Asian city state.Autumn Radtke, chief executive of First Meta Pte Ltd, was found dead at her Singapore home on February 26."The police are investigating the unnatural death," a police spokesman said late on Wednesday when asked about media reports Radtke had been found dead last week. He gave no more details. - See more at: http://www.phuketgazette.net/world-news/Phuket-Gazette-World-News-Singapore-police-probe-unnatural-death-of-American-CEO-of-bitcoin-trader/26776#ad-image-0"




Mar 23, 2014 5:54AM
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While not being but of average intelligence   I know that a currency must be at least in part based of on the solvency of the state issuing it. This is one of the prime examples of bubble head lunacy ever invented. It is a fine study in the ability to convince a large number of people in an absolute lie. Goebbels and Pravda would be proud.
Mar 20, 2014 8:58AM
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New bitcoins can't be created ? Oh ye of little faith in tech- especially if quantum computers are developed.
Mar 23, 2014 10:56AM
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I recently read where one economist predicted that the Bitcoin will reach it's actual value by this summer, that being nothing.
Mar 23, 2014 1:56PM
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If I had completed years of illegal acts which created  warehouses full of  dollars, I would welcome a trade to bitcoin. Funny money for ease of use by people involved in criminal activity doesn't sound like a stable method of investment.
Mar 23, 2014 12:18PM
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I just bought a bunch of play  money at Walmart............
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