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Cryptocurrencies and Precious Metals – Differences and Similarities

Published by Karl Martin Karus in category Precious metals on 10.01.2020
Gold price (XAU-SEK)
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Silver price (XAG-SEK)
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Precious metals and cryptocurrencies – what are the similarities and what are the differences? Which one between these asset classes can you rely on and which one possibly make you rich?
Precious metals do not need an introduction. Metals have been around since the very beginning. Even before the beginning as we know it. You can hold precious metals in your hand, you can wear them as jewelry on your finger, wrist or neck. You can also invest in it as a physical asset or you can trade it through different financial instruments. On the other hand, cryptocurrencies were first created in 2009 when mysterious BitCoin appeared on financial markets as an alternative decentralized payment option. It can not be tracked by standard government entities. Cryptos are electronically ´´mined´´ using an open-source software-based on blockchain technology.

Cryptocurrency and Precious Metals by definition

Cryptocurrency
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it very secure. It is nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by a disparate network of computers. A most important feature of cryptocurrencies is that they are generally not issued nor controlled by any central authority. This makes then theoretically immune to government interference or manipulation. [1]
Precious Metals
The precious metal is a term for the classification of metals that are considered to be rare and/or have a high economic value. The higher relative values of these metals are driven by various factors. For example their rarity, industrial usage, and investment volumes. The most popular precious metals for investors are Gold, Silver, and Platinum. [2]

Precious Metals vs Cryptocurrency

Cryptocurrencies, like fiat currencies, do not have physical backing. It’s a total digital solution backed by computer code and miners or nodes. On the other hand, there are natural precious metals. There is a fixed amount of precious metals on planet earth.
Bitcoin is the leading cryptocurrency today with a market cap of approximately 180 billion dollars. The amount of bitcoins is today a little bit more than 18 million, and the total supply that will be mined is capped at 21 million bitcoins. As a result, precious metals and cryptocurrency (Bitcoin in particular) are more alike because they both have a limited supply.

Mining

While the process of procuring precious metals as well as cryptocurrencies is referred to as ‘mining’, it means completely different processes. In the precious metals’ context, mining companies need machines and other equipment to dig precious metals out of the ground.
In the context of cryptocurrencies’, capital investment is needed to use mining farms. These mining farms have a lot of electricity and computers which are needed to create new crypto.

Difference in Value

The technology and network behind cryptocurrencies are mainly focused on transactions, to allow secure payments whereby, the underlying Blockchain network has to handle the transactions. This is done in the form of digital tokens which can be used to transfer value across the network. Cryptography is used on every crypto transaction: the cryptographic puzzle makes the protocol extremely difficult to hack and secure. If you compare crypto currency vs fiat currency one can say that cryptocurrency is more secure and far more cost-efficient in the context of transactions. In this digital world, the easy to transfer property of cryptocurrencies give it value.  However, one must consider the energy consumption behind the cryptocurrencies. As per sources, [3] in the middle of 2019, Bitcoins energy consumption equaled that of Switzerland.

The Big benefit of Precious Metals

Gold as a precious metal has stood the test of time: it has proven its value for more than 3000 years making it a very trustworthy financial asset. Gold has also proven to be a good hedge against inflation or any other monetary crisis on a global scale. As a result, gold is expected to maintain its intrinsic value and be treated as a form of money.
One of the main differences between precious metals and cryptocurrency is that precious metals are being used as actual commodities in several industries. Gold and silver are tangible assets and can be used to produce goods.

7 Differences between Precious Metals and Cryptocurrencies

  1. Let’s start with the obvious. Cryptocurrencies live only on the internet, gold exists in the real world.
  2. A physical Gold Eagle, Philharmonicer or Krugerrand in your hand is a tangible form of wealth – Cryptos rely on electricity and the internet.
  3. Cryptos can be hacked and many of them have been – You can not hack a Gold Bullion Coin
  4. Most cryptocurrencies are too volatile to serve as a real currency (Of course this can change in the future) – Gold has proven to be much much more stable investment with huge ROI and long-term store value for thousands of years.
  5. Gold has proven track record – Cryptos do not have a proven track record, yet. At the moment cryptos are rather a wild ride and mostly speculative.
  6. Gold is considered undervalued at the moment – Cryptos seem to be in a bubble.
  7. Gold coins and Gold Bars can get wet  – A USB-drive w§ith Bitcoins on it can not.

4 Similarities between Precious Metals and Cryptocurrencies

  1. Both are rare. Bitcoin and Gold are rare. You can not just create them as you can with FIAT currency. There are limited amounts of Gold and also Bitcoins. There will be only 21 000 000 Bitcoins and a limited amount of Gold. Also, governments do not have control over either of asset classes. Yes, they have them, but they do not own them.
  2. Durability. Gold can last for centuries and you can re-use it by melting and creating something new. Cryptocurrencies also are durable, as long as Internet lives.
  3. Divide into as many parts as you wish. Of course, it is easier to divide cryptocurrencies. For example, you can divide bitcoin into 0.00000001 parts. Theoretically, you can do the same with gold.
  4. They´re very hard to fake. Again, of course, you can fake gold, but today there are so many ways to test the purity of gold, so it is hard to make money with fake gold. The same goes for cryptocurrencies – they are almost impossible to fake.
  5. Both asset classes can be for investors who want to have their assets out of the traditional financial system.

What does the future hold for these two asset classes?

The future of precious metals can be rather easily predicted. When a financial crisis is around the corner, precious metals tend to get more expensive, since investors are moving their money to safe-haven asset classes. Precious metals are a very popular commodity and are used in several industries all over the world. The global industry is growing on a global scale because of the rising demand from India and China. As a result of this industrial demand added with the demand from financial markets gives a bullish outlook on precious metals for the coming years. Cryptocurrencies’ future can be predicted but it is highly speculative since this asset class is an infant compared to precious metals that have been around for thousands of years. Although cryptocurrencies can be the future, it is too speculative to predict price movements for cryptocurrencies. Time will show.

Conclusion

Cryptocurrencies are very speculative and highly volatile since they were first introduced to the World only 10 years ago. Investing in cryptos can make you rich quickly but it can also bankrupt you. Gold, on the other hand, has a proven track record for thousands of years and it has held its value. It also has shown stable growth and very good protection against inflation and financial insecurities.

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Disclaimer: This article is for informational purposes only and is not intended as an investment analysis or recommendation to sell or buy commodities. Tavex is not responsible for any decisions made based on this information. Investing is associated with opportunities and risks, and the market value of commodities can both increase and decrease. Past or future yields on the commodities and financial ratios shown above do not represent a promise or an indication of future earnings.

 

[1] Investopedia – https://www.investopedia.com/terms/c/cryptocurrency.asp
[
2] Investopediahttps://www.investopedia.com/terms/p/preciousmetal.asp
[3] BBC – https://www.bbc.com/news/technology-48853230

 

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