By Jordan Tuwiner
For decades, gold has been a safe-haven for investors during economic downturn. But what about Bitcoin? After earning the nickname “digital gold,” some say Bitcoin is giving gold a run for its money as a store of wealth, and potentially a new “Bitcoin standard,” well beyond its reputation as a purely speculative investment.
Despite having many differences, the precious metal that’s been used as currency for millennia shares common traits with the rising digital currency. In fact, some are even including Bitcoin as part of their retirement investments in specialized IRAs, sharing some similarities with so-called gold IRAs.
What is Bitcoin?
Bitcoin is an encrypted digital currency that relies on a peer to peer network, not controlled by any one person or organization.
Founded eleven years ago in January 2009, Bitcoin was worthless, and nobody knew about it. Today a single coin trades for around $8,500.
All transactions on the Bitcoin network happen on a public ledger — everyone can verify transactions and see the flow of money without publicizing personal information such as names, addresses, or social security numbers.
Bitcoins can be sent to and from a user’s digital wallet using an application on a smartphone or computer, privately, without involving a central processor or clearing house – which is key to some of its popularity and potential. As a method of payment, Bitcoin is often criticized for being slower, less energy efficient and more expensive than traditional payment processors like Visa and PayPal. However, Bitcoin was never meant to replace those traditional payment methods. Rather than becoming the next big payment processor, Bitcoin is seen by some to have the potential to overtake gold as a store of wealth in the digital age.
Volatility is the measurement of an asset’s price variation over a period of time. When it comes to choosing a good store of wealth, less volatile is usually better because you won’t have to worry about losing half of your net worth overnight – and this is especially the case for a retirement account.
As you can see from the graph below, Bitcoin is incredibly volatile, one of the reasons why it’s often criticized:
On the other hand, gold is considered far less volatile, making it a better choice as a store of wealth.
The liquidity of an asset is a measure of how quickly it can be used (bought or sold). Bitcoin can easily be purchased through exchange sites within minutes and is usually accessible directly after the purchase. Online exchanges like Coinbase make it extremely easy to buy Bitcoin and allow users to receive the coins before the wire is fully complete.
When buying Bitcoin, it’s not tradable until the purchase is finalized, although users can be susceptible to the volatility of its price movement instantly.
Gold cannot be purchased as quickly as Bitcoin since it is purchased from physical dealers, and often purchasing physical gold comes with a premium and high fees. Further, finding a buyer can become a hassle in some cases compared to Bitcoin’s readily accessible, global marketplace.
Mining and the Fixed Supply of Bitcoin:
Supply and demand is a fundamental principle of economics, and is largely responsible for both Bitcoin and gold’s natural ability to store wealth.
So how is it that Bitcoin can be mined? Only 21 million bitcoins can ever be in circulation, something that’s built into the foundational software underpinning Bitcoin. Currently about 18.3 million have been generated, with around 2.7 million to go. Bitcoins are created at a fixed rate, and mining them is resource intensive and competitive. The rate at which they are being found is slowing, and a fixed supply helps underpin value, and at the same time is an important factor in its dollar-price volatility.
What about Gold, How much is Out There?
The World Gold Council estimates that 190,040 metric tons of gold have been mined and are above ground, however since there isn’t a public ledger available, the actual amount could vary significantly. The total amount of gold left to be mined estimated to be under 200,000 metric tons, but again since there’s no correct way to calculate this information, it could vary. About 2,500 – 3,000 tons are produced each year, but this could level off.
Bitcoin IRA vs Gold IRA
With a Bitcoin IRA, cryptocurrency can be bought alongside traditional investments like stocks with the same tax advantages of using a traditional IRA account – i.e. pre-tax contributions grow at a larger scale and compound to a greater extent. However, the volatility of Bitcoin makes it a highly speculative and risky distribution and for that reason, not well suited even for highly diversified accounts.
Further, the availability of Bitcoin within IRA’s is relatively new, and the fees associated with these accounts can be high due to a small supply of companies willing to offer it. Further, most Bitcoin IRA’s are self-directed, and the custodians may not be held responsible for securing the investment.
A Gold IRA, on the other hand, is like a regular IRA, except you can make gold purchases through a brokerage. When buying gold through an IRA account, you’ll get the same tax advantages as a regular IRA account. Many people choose to buy gold with an IRA account for long-term investment and to hedge against other asset classes that might move in opposite direction in a market event or period of months or years.
Within a gold IRA, investors don’t have to handle the physical gold or worry about storing it – but again, investors can face steep fees so if that interests you, do your homework and ask lots of questions (in particular, regarding storage fees, cashing out fees, custodian fees, and seller markup).
Buying alternative IRA assets should be heavily researched, as they tend to have higher volatility than traditional investments like stocks or mutual funds.