It seems as though everyone gets excited about Bitcoin (and precious metals) as soon as it starts rising in price. Most seasoned investors will know that this is the worst time to capitalize on an investment. With Bitcoin’s rising value, it’s attracted heavy interest yet again. This can raise questions among the more cautious, especially those who have traditionally invested in solely precious metals and safer ways of increasing wealth. However, Bitcoin shares a relationship with PM’s in regards to its limited quantity and how investor’s perceive it’s value.
Believe it or not Bitcoin actually has a limit on how many can be produced. In total only 21 million Bitcoins can ever be mined, although there is talk that a change in protocol could change that number. The majority of Bitcoins have already been mined (roughly 18 million so far) and the amount that is being generated each year is being reduced by half. Similar to resources such as gold, and silver, Bitcoin is in limited supply. One of the reasons that these metals are considered valuable is due to their more rare nature. It can be argued that all of these metals have at least some intrinsic value, whereas Bitcoin itself does not.
‘Mining’ Bitcoins Requires Energy
Just like the traditional counterpart, mining Bitcoins takes energy. This is generally done in the form of computers solving computational problems. Of course the harder the problem, the more energy required. The exact amount of energy needed to produce a Bitcoin actually exceeds the amount used to produce the same value in gold. This can help add a sense of value to the Bitcoin itself. Obviously if miner’s are not making a profit mining Bitcoin, they will stop mining, and supply will decrease. The separation between a sense of value and actual value is important. No one cares if you’re selling a water bottle that took you 300$ to make. The perceived value also needs to match/exceed the production cost.
Here we touch upon a more abstract concept - value. If no one thought that gold was valuable, no one would purchase it. If demand fell, so would the cost of the product. But we know the reverse is true, most people associate gold with wealth and status. If you look at the news Bitcoin is all over the place, it’s rise in cost has attracted the attention of almost everyone. Even though more seasoned investors may be wary of it’s volatility, they know what Bitcoin is, and they know people think it’s valuable.
Value is highly subjective. A person who has been wandering the desert for two days would likely trade the same weight of gold for water. But just as gold, and the other precious metals have become ingrained as valuable in our society, it seems as though Bitcoin is on the same path. Considering that the last Bitcoin won’t be mined until 2140, one might think that this cryptocurrency will be in many people’s minds for the next century.
Parallel In History
While we may think of gold being valuable since time immemorial, there was a period where it wasn’t the method of currency exchange. In fact, prior to the innovation of currency many individuals would trade items based on their value or worth. Even when currency became a medium of exchange in Ancient Greece, it was based on electrum or a natural alloy of gold and silver. Eventually the process of separating the two became known, and gold became the more valuable metal.
What does any of this have to do with Bitcoin? Well, Bitcoin is a novel innovation of currency, but this isn’t a new event in history. Of course this takes into account my personal opinion, but I don’t think Bitcoin and cryptocurrencies will be going anywhere anytime soon. Especially if we look through the history books. That isn’t to say that this is advice to go out and spend your life savings on Bitcoin, you should always use caution when making investment choices.
You Can’t Hold It
One of the obvious differences between Bitcoin and precious metals is that you can’t physically hold Bitcoin. Or you can, but not in the way that you can hold say, a silver coin. One of my Instagram followers mentioned that unless he could hold something, he didn’t see any value in it (presumably as a safe haven). I can understand this skepticism, and it’s one of the biggest issues many individuals have with any cryptocurrency.
I’m not a cryptocurrency affiliate (at the time of this article), and I don’t generate any form of profit from this site. I’m not trying to sell anyone anything at all. With that in mind I would also make mention that this isn’t advice. Do your own research, watch the market, or talk to a professional about how you should invest. The main purpose of this article is to compare Bitcoin to precious metals and show how they’re interrelated.