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Physical Gold Value vs. Bitcoin Value

Published on 1/24/2022 by APMEX

A Gold Krugerrand and Gold Australian Kangaroo set against a black background depicting the Bitcoin symbol in green.

Physical Gold or Digital Currency?

More and more respected businesses, including APMEX, have begun accepting Bitcoin as a payment method, providing cryptocurrency with greater legitimacy and buying power. However, cryptocurrency is not without its risks. The importance of understanding the instability associated with Bitcoin and other cryptocurrencies cannot be overstated.

Bitcoin and its Value

Bitcoin often appeals to those who worry about the collapse of fiat currency. Hedging against financial uncertainty is wise, but is the use of bitcoin the best choice as your hedge? Invented in 2008, bitcoin is a cryptocurrency – meaning a digital currency without a central bank that can be sent electronically from user to user on the Bitcoin network. Cryptocurrency has more in common with fiat currency than you might assume. Fiat currency is legal tender not backed by a physical commodity, like bitcoin.

Bitcoins are created as compensation for a process called "mining," a records-keeping service logged using computer processing power. The payment depends on the amount of work an individual "miner" contributes to finding what is known as a block. After receiving compensation, a wallet store is necessary to store the information needed to transact bitcoins. Wallet stores hold your digital holdings to allow you access to spend them as needed.

History

Details of bitcoin's history are hazy, but the first transaction occurred in May 2010 between an enthusiast who was offering to pay for pizza delivery with bitcoin. When bitcoin was first introduced, the price fluctuated widely. It reached a high of thirty-five dollars per bitcoin in 2011, before dropping to around two dollars by 2013. Since then, it has risen steadily to reach record highs of over seven hundred dollars each in 2017.

When bitcoin was invented, it provided an alternative to fiat currency free from government or central bank restrictions – since its introduction, as prices soared, online establishments began accepting this form of digital currency. The belief that bitcoin offers an alternative to fiat currency is partially based on economic principles, but it also has roots in mistrust toward central banks after the failure of fractional reserve banking during the Great Recession.

The Bottom Line

Bitcoin today is not the bitcoin that launched in 2008. That bitcoin was valued at zero dollars, so its value cannot be compared to its current higher price tag. However, it is not difficult to still see bitcoin's appeal after the collapse of public trust in government-backed currency – despite its potential volatility and unknown future.

Bitcoin's volatility gives enthusiasts hope that it will become widely used as an everyday currency, but there are various reasons why it may never be used as cash. For bitcoin to function as money, bitcoin needs to become stable. Due to the unpredictability of bitcoin and its limitations, bitcoin may still be tempting even though the intrinsic value does not equate to its high price tag.

The Physical Gold Market Remains Reliable

The United States abandoned the Gold Standard for fiat currency in 1971. Fiat currency is declared legal tender by a government body without backing by a physical commodity, such as Gold or Silver. The value of fiat currency, like the U.S. dollar since 1971, is created based on supply and demand interactions instead of the previous Gold Standard. While the U.S. has a fiat currency now, there is still a relationship between fiat currency and physical commodities, like Gold.

The U.S. dollar's purchasing power has declined since being separated from Gold, while the price of an ounce of Gold still retains roughly the same relative buying power. In 1940, a fine men's suit cost about the same as an ounce of Gold, just as it does today, while the number in dollars has skyrocketed.

Civilizations have used Gold for millennia because it is rare, durable and malleable. Gold may not have the practical applications for computers like bitcoin, but physical Gold is a time-tested commodity with a value that has persisted through seven thousand years of human history. Buying physical Gold holds an appeal for many because it can be used in any amount, from a tiny fraction of a gram to a massive bar, for many uses other than simple currency.

Gold vs. Bitcoin: Intrinsic Value and Investment

Gold has intrinsic value and many applications besides currency. Bitcoin is only used as currency, meaning it lacks intrinsic value and is an unreliable investment. This may seem insignificant when looking at the parallels between Bitcoin and fiat currency, but this difference becomes crucial if we shift the discussion to investment products and practical uses. If you own Gold or any other Precious Metals assets, you have something with enduring value.

Gold is in demand by many industries. Its practical application extends from space travel to exquisite jewelry. Here are a few practical uses of the Precious Metal:

  • NASA needs to build space vehicles with the most dependable parts possible. For this reason, Gold is used in many applications involving space travel. The circuitry of the space vehicle is Gold because the Precious Metal is a highly dependable conductor of electricity.
  • Gold is the most malleable of all Precious Metals. This allows Gold to be hammered into sheets as thin as a few millionths of an inch. The hammered sheets are known as Gold Leaf and add Gold to furniture, picture frames and other household items. Gold does not easily corrode, making Gold Leaf applicable to decorating external and internal surfaces of buildings.
  • If you use a cell phone, laptop, desktop or tablet -- you own Gold. Gold can transmit digital information better than any other Precious Metal. The mounting of microprocessors and memory chips uses Gold plating and the connectors used to attach cables. Gold is even used in GPS systems and calculators.
  • More than 75% of the newly mined Gold is used in jewelry. Gold has been used in jewelry for centuries because of its gorgeous luster, color, malleability and resistance to tarnishing.

When Looking for Reliable Investments - Gold is the Best Standard

While bitcoin has its advantages of hedging against fiat currency, Gold is much more intrinsically valuable because it will still hold its value even if bitcoin continues its current trend and fails as money. Even bitcoin enthusiasts acknowledge it's in a bubble, which its volatility points toward it being unsustainable. For bitcoin to succeed as money, it needs to hold its value and be stable or increase in value after initial fluctuations.

Physical Gold is the most stable form of investment because there will always be a market for Precious Metals. Gold can provide a protective hedge against the volatile market due to its consistency and reliable applications, while Bitcoin can be unstable. When you seek a safe-haven asset that will retain its value when all else fails, Gold is truly the Gold standard.

Gold makes for a great investment opportunity; for any questions regarding the eligibility of any specific Gold products in your investment portfolios, APMEX recommends consulting a financial advisor or professional.

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