Gold vs. Bitcoin: An Overview
Analysts and amateur economists love to sound alarms over a looming recession. The Great Recession of the 2000s was followed a decade later by the COVID-19 recession, one of the shortest in history. The reoccurrence of recessions has renewed the interest investors have in making sure they lose as little as possible if a recession hits.
As an investor, you’d traditionally hold a portion of your portfolio in precious metals like gold. This provides a hedge against the losses stocks can take during a downward economic trend. This has proven effective and still is—but a new alternative is challenging this old-school capital preservation method. Bitcoin is proving to be an interesting asset for investors because it has been around long enough to gain recognition and support—it is even showing a few trends.
Bitcoin
Bitcoin launched in 2009—the decentralized technology ushered in a new era in finance and investing. Initially, these digital currencies were only attractive to a few niche enthusiasts. In 2010, early speculators discovered the Bitcoins they had previously purchased for fractions of a cent had grown to $0.09 per Bitcoin. Large-scale Bitcoin mining farms and pools became popular, and cryptocurrency exchanges emerged.
When the Covid-19 pandemic began to shut down economies worldwide in 2020, speculators and investors noticed that Bitcoin’s value wasn’t falling alongside stock values. They started pouring capital into it, institutional investors continued looking for ways to create investment instruments and funds from it, and its price soared—by April 2021, Bitcoin’s price hit $61,000.
Gold
Gold historically performs well during market corrections because it maintains its value; its price holds somewhat steady, then tends to rise as investors move from stocks to gold if a recession is threatening. This makes it useful as a hedge—an investment that moves opposite another—against market corrections or recessions.
During the Covid-19 pandemic, not all investors turned to Bitcoin; many followed traditional strategies and transitioned to gold. As a result, gold’s price skyrocketed from just below $1,300 in late 2019 to nearly $2,100 in mid-2020. Through 2021, its price dropped as economies slowly recovered, but it still averaged higher than pre-pandemic recession levels.
Differences
Gold has dominated the economies and markets for thousands of years as a means of exchange and holding wealth. Bitcoin was launched in 2009 and only achieved widespread recognition several years later. Other key differences can provide clues into which one you might want to include in your portfolio.
◾ Regulation
Gold’s established system for trading, weighing, and tracking is pristine. It’s very hard to steal or fake; it’s also highly regulated. In many countries, you cannot cross borders while carrying gold without regulatory permission. When investing in gold, you’ll generally only be able to purchase it from registered dealers and brokers; one caveat is that you should only buy physical gold if you can safely store it.
Bitcoin is also difficult to steal and fake, thanks to its encrypted and decentralized system. It is generally legal to use across the borders of different countries, with a few exceptions. However, the regulatory infrastructure that could exist to ensure that users are safe is not yet in place—the anonymous nature of cryptocurrency also makes it challenging to regulate.
◾ Utility
Gold has historically been used in many applications—currency, luxury items, specialized applications in dentistry, electronics, and much more. This cross-functional utility has given gold its ability to maintain value when other asset values fall.
Bitcoin is limited in its utility. It is currently only used as a digital currency and a speculative investment. However, there is an emerging financial technology whose concept is to use cryptocurrency for financial transactions called decentralized finance. Bitcoin has utility in this emerging tech as a form of lending, borrowing, and possibly more. It also has the potential to be involved in nearly as many applications as gold—but following the same line of thought, it has just as much potential to become useless and invaluable.
◾ Liquidity
One primary concern for investors looking toward Bitcoin as a haven is its liquidity. Cryptocurrencies are generally very liquid assets; however, this may not always be the case. There are times when it might be more liquid than other assets and times when it isn’t.
For example, if you had several hundred Bitcoin, you might have a hard time liquidating them if you wanted to get out of cryptocurrency in a hurry—exchanges such as Coinbase only allow for $50,000 liquidation of cryptocurrency per day. If Bitcoin’s price is higher than the daily limit allowed by your exchange, you’ll only be able to do it in smaller increments. If you don’t own many Bitcoins, it might be a much more liquid asset for you. Additionally, if the market swings wildly and many investors begin selling their Bitcoin, its price would drop dramatically in response.
◾ Volatility
Bitcoin has historically proven to be subject to the media effect, investor sentiment, regulatory actions, and hype. News from the digital currency sphere could prompt investors to panic and make quick decisions, quickly sending Bitcoin’s price upward or downward. This volatility is not inherent to gold for the reasons mentioned above, making it perhaps a safer asset.
In recent years, several alternative cryptocurrencies have been launched which aim to provide more stability than Bitcoin. These coins are called “stablecoins” because their prices are pegged to fiat currency or another stable asset. For instance, Tether is linked to the value of the U.S. dollar.
Whether Bitcoin is a better investment than gold boils down to your investment goals, whether you enjoy speculating, your risk tolerance, and how much capital you can stand to lose if the market turns. A financial advisor can help you create investing goals and decide whether Bitcoin is a good investment for you.
Is Bitcoin Rarer Than Gold?
Gold is one of the rarer metals. Bitcoin is rare compared to other cryptocurrencies, and gold is rare compared to other metals. They are both rare in their respective categories.
Is Bitcoin Like Gold?
Bitcoin is similar to gold in that it has become an alternate investment for some investors. It has the potential for many uses and can be a worthwhile investment if used in the right strategy.
Is Bitcoin a Better Investment Than Gold?
Which is better depends upon your risk tolerance, investing strategy, how much capital you have to use, and how much you can tolerate losing. Bitcoin is much more volatile than gold, making it a riskier investment than gold.
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