Bitcoin vs. Gold: Which One Is A Better Investment?

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There is no doubt that Bitcoin and cryptocurrencies in general are as popular as they have ever been, be it wider adoption by institutions or crypto terms such as “NFTs” becoming part of everyday conversations.

Many see Bitcoin as Gold 2.0. And some hardliners claim that in the face of rising inflation, it is bitcoin, not gold, that has risen. All of which raises the questions: Which is better for a portfolio: gold or bitcoin? And how should investors approach each?

The Short Version

  • Some investors have come to see Bitcoin as a possible inflation hedge in the same way that gold is.
  • While gold has been around for centuries, Bitcoin was invented in 2009 and there's still a lot we don't know about it.
  • It's not easy to compare gold and Bitcoin, as gold is more stable and Bitcoin tends to be more volatile but is generally worth more than gold at the moment.
  • Instead, each asset can serve a different role in a well-balanced investment portfolio.

What Is Bitcoin?

The asset that really started it all in the crypto space is Bitcoin. Bitcoin was invented in 2009 and released with a white paper written by an anonymous author or group of authors who went by the name of Satoshi Nakamoto.

The whitepaper revealed some of the ideological reasons for the creation of the new currency. During the Great Financial Crisis, Satoshi wrote that a decentralized international currency with an open-source ledger would ultimately be far more resilient than a monetary system built on fractional-reserve banking.

Characteristics of Bitcoin

Bitcoin was created with a few characteristics that have remained constant from its founding all those years ago. Those include its decentralized nature. There is no central authority that can control or approve transactions, in contrast to traditional financial transactions.

An additional factor that adds to the decentralized nature is the fact that the Bitcoin network is peer to peer. This means that instead of a centralized system storing all the history of transactions on one server, the server is instead shared among all users. This decentralization gives Bitcoin unique protection against malicious attack — there is no central point — as well as the fact that no single entity can control or manipulate the currency.

This feeds into the second facet of Bitcoin: its transparency. Every transaction that occurs with bitcoin is recorded on a decentralized ledger, spread across all users of bitcoin, free for anyone to see and track. There is also a degree of privacy: All these transactions are marked with the number of the wallet that initiated them, rather than the personal details of who is doing the transfer.

One of the main reasons people have come to see bitcoin as an inflation hedge and new-age replacement for gold is the fact that the total supply is capped at 21 million. The supply of bitcoin today is still below that level, with new bitcoins being mined at ever slowing rates until it reaches the total cap. Once this cap is reached, the logic goes, bitcoin should be the best inflation hedge as no new supply can ever be created.

Find out more: Bitcoin Basics… What Are Cryptocurrencies and Blockchain?

How to Invest in Bitcoin

Once upon a time, investing in bitcoin was a lesson in patience and perseverance due to the lack of security, brokers and high quality services. Today is a very different story. In fact, one of the largest cryptocurrency brokers, Coinbase, is a publicly traded company.

Today's brokers make it easier than ever to buy bitcoin and other cryptocurrencies in a wallet with that broker. Of course, investors can buy a physical wallet that they can then connect to their computer when they need to make transactions. And this adds another layer of security.

For those still uncomfortable with the idea of providing their personal and credit card details, there is a growing number of ways to get exposure to bitcoin through your traditional investment broker. For example, the Grayscale Bitcoin Trust tracks the price of Bitcoin. And the ETF, BITO, tracks bitcoin futures. Besides those, a number of companies focus on cryptocurrency and bitcoin-based services, such as banking services. Stock of those companies highly correlates with the price of the crypto currency.

Read more: How to Invest in Bitcoin

What Is Gold?

Gold of course is a precious metal. It's been linked to money in one way or another for over 2,000 years. Highly valued for its luster, its ability to avoid being tarnished and its scarcity, gold has been the basis of currencies for millennia.

Originally coins were minted with varying degrees of gold and silver purity to denote value. The ancient Lydian empire minted the first coins around 550 BCE. This far predates Ancient Greek usage of gold coins. Other civilizations that used gold in coinage include Ancient China, the Roman Empire and the Parthian Empire.

The Gold Standard

For hundreds of years, countries embraced the gold standard. This means their currency was redeemable for a fixed amount of gold. This backed their currency by the value of gold. And it forced fiscal discipline on the countries. So countries couldn't print their way out of problems due to the fact that they had to back all the money in circulation by gold.

In the aftermath of World War II, the Bretton Woods system was established. In this system the world's major currencies were pegged to the U.S. dollar. And the dollar remained pegged to gold. This agreement made the U.S. dollar the de facto world reserve currency.

But eventually, the U.S. found itself under financial pressures with the Vietnam War, an extensive debt-fueled welfare program and a trade deficit, along with major economies demanding payment in gold rather than dollars. This all led to then-President Nixon abandoning the gold standard.

Because gold is virtually indestructible, most of the gold that has ever been mined is still accessible in some form. Current estimates suggest that 197,576 tonnes of gold has been mined. Two-thirds of this has been mined since 1950. Today, 75% of annual gold supply comes from mining. The rest comes from recycling of gold. Because of gold's stability and ability to not tarnish, it is easy to recycle it from jewelry or technology in which it was used.

How to Invest in Gold

Since gold has been seen as an investment for centuries, there are already a number of ways for investors to get exposure to the precious metal.

The oldest method of getting gold exposure is to own the physical gold itself. Numerous dealers all over the world specialize in buying and selling gold. Buyers buy gold based on weight, through coins or bars. This of course means you need to physically store it somewhere. And that creates a risk at home, which means a third party service would need to be ordered.

As an alternative, there is the pure gold commodity futures contract. Gold miners and traders around the world use this derivative to hedge and speculate on the price of gold. All gold internationally is set to this price in one way or another. But for those who don't want the leverage or hassle of dealing with futures, ETFs exist that track the price of gold (for a management fee).

Finally, investors can invest in gold mining companies. These of course are businesses like any other and come with those risks. But gold companies also have the unique risks of a commodities-based business. So the fortunes of these companies often rise and fall based on the price of gold. But these companies often have high built-in leverage to any large rises in the price of gold.

Find out more: How to Invest in Gold

Comparing Gold vs. Bitcoin

Many fans of the cryptocurrency say that bitcoin is this generation's gold, or Gold 2.0. From a figurative or ideological point of view this may hold some merit. But when looked at on a purely investment basis, it is more like comparing apples to oranges.

Gold has very low volatility and generally moves fast only in times of persistent inflation, high uncertainty or crisis. Bitcoin behaves quite differently. Bitcoin often acts like a highly volatile risk-on/risk-off asset. This means the price rises when risk is being taken in the markets and sold when it is not. In this way gold and bitcoin act as quite opposites.

Comparison Chart, Bitcoin, Gold and Oil, 2014–2019
Cumulative return of investing in bitcoin, gold and oil, April 2013 to December 2019 Source: CoinTelegraph

It is important to note however that these correlations and performances are bound to change, especially as bitcoin is still so new and is getting picked up by more and more institutions that have real influence on market pricing.

At the end of the day, investors should understand that each of these assets behaves very differently, but they do share one thing. They both act as a hedge against central bank folly. Both of these are assets that central banks do not have direct control over and cannot use monetary policy to manipulate.

Benefits and Risks of Bitcoin

Bitcoin is a new asset class. This was once one of the major risks. But it has now crossed over into the mainstream and is getting more and more institutional involvement. Now its newness is a huge benefit, as bitcoin still has plenty of room to grow and mature. Likewise, institutional investment has significantly reduced the chance that bitcoin will suddenly go to zero. Additional tailwinds include the increasing ease with which one can gain bitcoin exposure for investment accounts.

In terms of risks, it is still a highly volatile asset class, where 20–30% rapid drops in price are seen as part and parcel of the investment. But the price swings to the upside just as quickly.

Bitcoin is still a relatively new technology in terms of institutional adoption. It has put up terrific returns in the last couple of years, as it becomes more and more mainstream. But it is impossible to tell whether it will continue to do so or start correlating with other assets.

Finally there is always a geopolitical risk of a significant crackdown on crypto. We saw this in the past from China. And the U.S. significantly reversed regulations recently.

Read more: What is the Future of Bitcoin and Crypto Regulation? 

Benefits and Risks of Gold

Gold has been in use continually for 2,000 years. At this point it is safe to say that it's not going anywhere. Out of all assets, it also has the longest proven history of at least maintaining its price, if not increasing, during times of crisis. This makes it a proven hedge against inflation. In more modern terms, we have seen gold outperform during periods of consistent inflation in both emerging and developed markets.

The risk is that gold has never been a wealth creator, but more of a wealth protector. Adding to that, gold has suffered prolonged periods of minimal returns. And that makes it a difficult asset for investors to hold long term.

Bottom Line — Should You Buy Gold or Bitcoin?

We don't believe it's a case of either/or. Each asset fulfills a different role in a portfolio and serves a different purpose. So investors would do well to invest in both. How much? Well that depends on risk tolerance. For those who want peace of mind above all else and don't mind seeing a slow-moving asset, a higher allocation in gold is better. For the risk taker, bitcoin is a much better bet.

Both of these assets work well, just in different environments. With that in mind, investors should hold both in order to gain maximal diversification.

Find out more: How Much Crypto Should You Have in Your Investment Portfolio?

Isaac Aydelman

Isaac Aydelman is a student of economics and a former soldier. Drawn to financial markets from an early age, he has experience in futures trading and manages his own personal investment account. Isaac is always interested in expanding his horizons and looking out for opportunities in finance.

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