Macro effects of gold stored in a metals depository versus btc on an exchange

[nodoctina]

What major differences, if any, are there between holding bitcoin on an exchange versus owning gold bouillon at a precious metals depository? They both appear to be IOU's for a commodity that would be costly to store on your own.

I've been researching how owning things like gold bouillon or coins work, as compared to owning bitcoin on an exchange (to better understand the macro impacts this has,) and it seems awfully similar to how an exchange works.

As an example, here is Coinbase's User Agreement (trimmed for ease of reading):

2.6.1 Ownership. Title to Digital Currency shall at all times remain with you and shall not transfer to Coinbase.
...

2.6. Digital Currency Custody and Title. All Digital Currencies held in your Digital Currency Wallet are custodial assets held by Coinbase for your benefit, as described in further detail below.
...

2.6.4 Digital Currencies Not Segregated. In order to more securely custody assets, Coinbase may use shared blockchain addresses, controlled by Coinbase, to hold Digital Currencies held on behalf of customers and/or held on behalf of Coinbase
...

[jackg]

Are you comparing bullion stored in vaults by the company or vaulted by the buyer?

If it's the former then I can see a key difference is that you can demand your btc or fiat value from the exchange, I think you can only sell your metals back to the bullion services normally and not withdraw them. There's also normally inflation added to the vaulted assets as a service charge (you may buy 100g of gold but you may physically own 60g after a while due to the company selling extra gold to pay for security and other things) .

[teosanru]

You are actually correct there isn't much of a difference. Both the exchange and a depository would merely tell you your depository number/wallet address but won't give you the key instead would allow you to transfer the same to another exchange. To explain you the process:

1. Every exchange generates a unique address for you from their set of addresses to which they hold the private key. While they connect that address to your specific account.

2. In this manner when you receive something at your address it would directly reflect in your Exchange account.

3. One very different thing is that most exchanges would charge a heft withdrawal fee which would be absolutely different from what would have been charged if you had the private key wallet and send it on your own.

4. You own the address and Exchange holds your private key. So technically giving your private key to the exchange is similar to keeping your coins with someone else because one who has the key to the locker has complete access to it. So technically user just has an IOU agreement. There have been quite some scams in this area too.

[nodoctina]

Are you comparing bullion stored in vaults by the company or vaulted by the buyer?

If it's the former then I can see a key difference is that you can demand your btc or fiat value from the exchange, I think you can only sell your metals back to the bullion services normally and not withdraw them. There's also normally inflation added to the vaulted assets as a service charge (you may buy 100g of gold but you may physically own 60g after a while due to the company selling extra gold to pay for security and other things) .

Thank you for the response.

Yes I think the former (something like this: https://www.jmbullion.com/storage/) is what I had in mind. Though perhaps a crypto exchange would be more similar to this: https://www.fidelity.com/trading/investment-choices/gold-silver-platinum (seeing as on a crypto exchange you can actively trade your coins.)

I'm working through a thought experiment on how a macro shock resulting in a "run" on an exchange would play out versus a run on a depository arrangement of your gold bullion or coins. 

[Darker45]

Three things:

1. It is not costly to store Bitcoin on your own. All you need is a hardware or paper wallet. That will only cost you a few dollars. You don't have to regularly pay for this storage.

2. It is harder for your gold bullion at a precious metals depository to get stolen or robbed than your Bitcoin in an exchange. 

3. I'd rather choose gold in a depository than Bitcoin in an exchange. Your gold bullion in a depository is most likely insured. Your Bitcoin in an exchange is most likely not.

[figmentofmyass]

What major differences, if any, are there between holding bitcoin on an exchange versus owning gold bouillon at a precious metals depository? They both appear to be IOU's for a commodity that would be costly to store on your own....

you're correct about the IOU part. i disagree on the second point.

bitcoin is extremely cheap to store on your own. one of its key features is portability. an output worth $1 billion is the same size as an output worth $1. this is completely unlike gold, which becomes incredibly expensive to store at scale, due to the physical facilities required to house it.

imagine storing billions of dollars worth of value in a thumb drive, or hidden inside a set of 12 words. that's the power of bitcoin.

[magneto]

What major differences, if any, are there between holding bitcoin on an exchange versus owning gold bouillon at a precious metals depository? They both appear to be IOU's for a commodity that would be costly to store on your own.

Firstly, I would argue that it is entirely untrue to assert that BTC is somehow expensive to own on your own. Anyone can set up an electrum wallet with relative security with absolute ease, compared to the cumbersome storage process for precious metals.

But I guess your question comes down to this - do you prefer legal entitlements, or physical/immutable network entitlements?

Indeed, legally wise there is no difference. But you'd be trusting Coinbase and other wallet services to not run fractional reserve, and to keep enough equity to compensate for any security breaches/losses. Would you rather trust a company to do that, or not have to worry about it by holding BTC in your own wallet/holding physical gold/silver as opposed to IOUs?

[jacafbiz]

Bitcoin is not designed to be kept on exchanges, exchange is just a platform to transfer transfer to someone willing to pay your asking price for BTC, this is why people are demanding we have a scalable DEX. Bitcoin on exchanges are not IOU so they claim this is why we need proof of reserve to proof they actually hold the BTC they claim they have

[bits4books]

In general, nothing prevents you from buying physical gold and storing it under your pillow - just as nothing prevents you from storing your tokens/coins on your cold wallet. The only difference is that in the case of an ordinary metal account / cryptocurrency wallet, your usability and mobility are very high, but there are also classic risks like the bankruptcy of an exchange/bank - when, as sacrificing the convenience of using your assets, you can keep them 100% safe (not counting the possibility of robbing your home).
These are only access and storage methods and not some kind of conspiracy (not counting some "very interesting" exchanges).

[jaysabi]

I’m thrown by the claim that it’s costly to store bitcoin on your own. Isn’t that one of the cheapest assets to store since all you need is to secure the private key? What is so expensive about that?

[hatshepsut93]

Having an account for storing physical gold would probably come with significant fees, while Bitcoin exchanges don't have maintenance fees, because they cover them with trading fees. Another difference is how and cold wallets - gold custodians don't usually have a second less secure storage for quick transfers, and they certainly get robbed far less than exchanges.

Also, in some countries Bitcoin is not fully recognized, so investors over there have much less legal protection than with gold.

[Febo]

Macro effects of gold stored in a metals depository versus btc on an exchange

Why would you want to have Bitcoin on an exchange?  Only reason I see is to sell it. You can sell it really fast unless you have set a sell order high and are waiting for price to increase. But even than you can do it maybe a week in advance or max a month.

In general the main difference between Gold and Bitcoin is that you can withdraw your Bitcoin from an exchange in less than 1h while can take days to get one from Gold store.

[STT]

Gold isnt expensive by itself to store, its inert and its basic requirement for safe storage are really low but we're stating that because its worth alot then it becomes a security risk.   Quite ironic but anything can be costly if the idea of worth being a liability is accounted for.    The main difference to BTC then is the space it occupies and you dont really need to let anyone know you possess it so to steal what is not known is less of a liability I suppose.   I think quite a few with some gold would just bury it and never let anyone know about its ownership, I dont see gold is worse.  Some commodities cost alot to store, oil and all the agriculture types will cost especially but sure BTC is superior efficiency as its virtual but Im not sure thats a premium as some prefer actual physical ownership.
   Again the main difference is centralized or decentralized and even the personal deposit you could argue it can be recalled anywhere and is not physically located so safer to 'move'

while can take days to get one from Gold store.

That part again I see as similar, I can close a gold position and have the gold physically by using the position credit to purchase it nearby.  I will experience spread losses from this trade possibly but BTC isnt immune from a spread cost to it either.     Lots of assets are priced and traded digitally, we cant say BTC is better for these reasons.   The ledger and settlement of ownership is not reliant on central bodies, thats always the main difference I can think of.

[Ucy]

I wonder why the custodianship (of both Bitcoin and precious metals) by companies are not structured in a way that allows users control their keys and simply pay fee for security of the vaults where their Gold or Precious metals are stored... Whenever they want to access the Gold, they could simply just walk into a depository/bank (and probably provide their ID) , unlock the vault and take the Gold.  Same thing should also apply to crypto exchanges. It should be the minimum standard for operating any kind of Bitcoin/crypto exchange in order to limit the old custodial approach by financial institutions in Crypto space.