Investing in Gold vs Investing in Crypto: Which One is Better?
Do you fear that stock market swings will negatively affect your investments? If yes, then you have to consider safe haven assets as soon as you can.
Safe haven assets like gold and potentially even Bitcoin (BTC) could offer investors a level of protection in times of market turbulence.
As they are negatively correlated or at least alternatively correlated with the general market, investors can limit their losses or even make profits with safe haven asset investments during recession and times when other assets are highly volatile.
After gold had been untied from the US dollar in 1971, investors have been considering the precious metal as the standard safe haven asset in traditional markets. It is a proven asset, that over the course of more than a century has outperformed all fiat currencies.
However, in 2009 when the anonymous Satoshi Nakamoto created Bitcoin, there soon arose the prospect of a type of digital gold. Since then, despite its infamous volatility, some have considered Bitcoin as a safe haven asset as well, experiencing rising popularity among investors who seek to diversify their portfolio to limit the risks of an upcoming bear market.
But which asset should investors choose? Bear with us as we’ll find out in this article where we compare Bitcoin and gold.
Before we deep-dive into our comparison, let’s take a closer look at both, starting with gold.
Gold has proven itself as a strong safe haven asset throughout human history. In addition to its use-cases in several industries (e.g., to make electronics and jewelry) as a valuable material, the precious metal is also scarce.
Unlike stocks, bonds, or fiat currencies like the US dollar, neither individuals nor organizations can “print” gold as the precious metal is available only in limited quantities. Furthermore, to convert it into an investment vehicle, gold has to be mined from the ground and then processed.
Moreover, even when market demand is surging, the gold supply remains at very low levels.
Due to the above-mentioned features of the asset, gold has shown a decent performance in times of recession. And even when the price of the precious metal fails to rise — but remains stable instead — it offers an excellent opportunity for investors to hedge against market turmoil.
Since Bitcoin’s birth, many have referred to it as a form of “digital gold” due to BTC’s low correlation with other assets on the market (e.g., stocks and bonds).
Like gold, Bitcoin has its own set of use-cases. Powered by blockchain technology, the digital asset is designed to function as a peer-to-peer (P2P) electronic payment system that features decentralized, global transactions between users.
As the cryptocurrency has been issued without the supervision of any government, central bank, company, or any other entity that could have a disproportionate influence on its performance or direction, many consider BTC a suitable asset to own — if you hold the private keys to your Bitcoin wallet, it is truly yours.
Instead of utilizing a centralized system, Bitcoin is decentralized by nature, with its network maintained by miners who are responsible for processing and verifying BTC transactions, as well as adding them to the digital asset’s blockchain.
Similar to gold, Bitcoin is also a scarce asset. The cryptocurrency has a limited supply that is capped at a maximum of 21 million coins.
Bitcoin vs Gold: The Ultimate Comparison
Now that we’ve explored Bitcoin and gold separately, it’s time to compare the two to see how they perform as safe haven assets.
First, it’s important to analyze the value of the two assets.
In terms of gold, the precious metal has been used in many cases throughout history. Nowadays, organizations utilize gold as an important material to create a wide range of products, including luxury items and technology components.
Since its birth in 2009, Bitcoin has also proven itself as a valuable asset. As the first cryptocurrency, Bitcoin features a decentralized payment system that can be used by anyone in the world to receive, send, hold, and withdraw digital assets.
With a continuous network uptime, low-cost payments, and a decentralized infrastructure that is secured by thousands of nodes from all over the world, Bitcoin has the potential to become a viable alternative to the traditional banking system.
We can safely say that both Bitcoin and gold are scarce assets as their supply is limited.
While gold is a precious metal that can’t be produced without mining the necessary materials first, Bitcoin’s maximum supply is written in computer code that prevents the network from generating (mining) more than 21 million coins.
As we don’t precisely know when the last Bitcoin will be mined as well as the exact amount of gold resources we have access to, it is hard to say which asset is more scarce.
Safety and Reliability
It’s also important to assess how secure and reliable the two safe haven assets are.
Gold has already established a strong reputation as a reliable asset, with the precious metal featuring a decent infrastructure for trading, weighing, and tracking the asset.
Also, it’s legal to purchase gold in most countries.
On the other hand, cryptocurrency is a relatively new asset class, which may make some investors shy away from it for now. While the digital asset is legal (or just not regulated) in most countries, the cryptocurrency industry is a top target for hackers, fraudsters, and other cybercriminals.
In the past, the cryptocurrency industry has suffered multiple major cyber-attacks — such as the high-profile hack of the digital asset exchange Mt.Gox that led to the loss of over $450 million in crypto.
As a result of the above-mentioned, Bitcoin’s reputation as a safe investment vehicle has suffered, despite the fact that the network of the cryptocurrency utilizes public key cryptography as well as a decentralized architecture to provide a high level of security to its users.
However, we would like to emphasize that, like gold, Bitcoin is indeed a reliable asset that can be purchased, sold, held, and withdrawn securely if you use legitimate services.
To avoid fraud, we recommend doing your own due diligence before using a new cryptocurrency-related service (e.g., a crypto exchange).
When investors seek to put their funds into safe haven assets, one of the most important factors they consider is volatility.
While gold has managed to keep its volatility at a relatively low level in the past few years, Bitcoin has been considered as a highly volatile asset.
As a result, Bitcoin has experienced several cases when its price has reached excessive highs as well as sudden lows.
The cryptocurrency market of late 2017 and early 2018 is a good example of the latter. In December 2017, after reaching almost $20,000 at the peak of one of the largest bull runs in the history of crypto, BTC’s price took a downturn, falling to $3,100 in 12 months.
For some this may have resulted in great losses, but those vested in futures trading who were able to short the asset have reportedly been able to make great gains.
While gold has had its own share of price crashes — like in 2012 and 2013 when the precious metal’s value dropped from $1,800 to $1,200 in 14 months -, the asset’s price has proven to be more stable than the price of Bitcoin.
Stablecoins — cryptocurrencies pegged to other assets to keep volatility at a minimum — could provide a safer alternative for investors who seek to limit the risks of major price movements.
Currently, there are numerous stablecoins on the market, with some pegged to fiat currencies like the USD, and other assets.
It’s important to mention gold-pegged stablecoins (such as AUXT and BitGold) that allow investors to gain exposure to gold on the blockchain.
Gold enjoys a well-established infrastructure for trading the asset. However, investors do have to use the services of brokerages to purchase the precious metal.
As a result, gold investors have to go through the time-consuming process of applying for a brokerage account and may face high fees when trading the asset.
Also, as many brokerages use fixed fees for trades on their platforms, investors have to purchase gold in larger volumes to reduce their costs.
On the other hand, Bitcoin investors don’t necessarily have to use the services of intermediaries like brokerages to acquire cryptocurrency.
Furthermore, as they have plenty of options to choose from (ranging from crypto exchanges to local services like Bitcoin ATMs), the trading fees are lower. As a result, they can purchase the digital currency even in very low amounts, making Bitcoin a more accessible asset than gold.
Gold-pegged stablecoins could not only solve the volatility issues of cryptocurrencies, but these assets can also offer an alternative, more accessible way for investors to gain exposure to the value of gold.
Bitcoin and Gold: Two Viable Safe Haven Assets for Investors?
Gold has proven itself as a viable long-term store of value that features relatively low volatility, Bitcoin and cryptocurrencies provide a next-generation of investment assets with higher volatility but increased accessibility for market participants.
Eventually, we’ll see an increased number of gold-pegged stablecoins on the cryptocurrency market, which will make it possible for users to invest in gold as a digital asset while ensuring a low level of volatility.
In the end, while we do not provide investment advice, we believe the key lies in diversification. Adding Bitcoin and other cryptocurrencies to your investment portfolio could potentially yield returns amidst macroeconomic turmoil; allocating a portion to gold (whether through a broker or via gold-pegged stablecoins) could significantly add stability.
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Originally published at https://academy.aax.com on February 25, 2020.