We Clear the Question Marks: Bitcoin or Gold as an Investment Vehicle?
We have listed the advantages and disadvantages of investing in gold as a valuable asset and Bitcoin, the cryptocurrency the whole world is talking about.
The question of Bitcoin or gold comes to the forefront with the exponential growth and increasing popularity of Bitcoin and cryptocurrencies, attracting the interest of many investors. Furthermore, some social influencers are questioning whether Bitcoin can play a similar role to gold in an investment portfolio. But despite some similarities between the two assets; they are predominantly limited in supply and have an alternative role to fiat currencies. There are therefore also some key differences that investors and potential investors should carefully consider.
Cryptocurrencies can offer a real decentralized economy?
Bitcoin or Gold?
Gold has been seen as an effective store of wealth for thousands of years. According to the World Gold Council, gold has offered a source of returns rivaling the stock market over various time periods. It has traditionally performed well in times of inflation and has a highly liquid and established market. Gold has played an important role as a portfolio diversifier and has often negatively correlated with the market during economic downturns.
The cryptocurrency market is still in its infancy and price behavior seems to be driven by momentum around investor expectations of high returns. Bitcoin has been much more volatile than gold over the past two years and has therefore added additional risk to investment portfolios. The World Gold Council suggests that portfolios with high Bitcoin or cryptocurrency allocations could benefit from higher gold allocations due to its hedging role against risk.
Fundamentally, investor’s view gold and cryptocurrencies as having very different roles within an investment portfolio. A survey conducted by the World Gold Council in 2019 revealed that investors view cryptocurrency as a more speculative investment and value it for the opportunity to generate returns in the short term. Gold, on the other hand, was valued for its strategic role in preserving wealth over the long term and as a hedge against riskier investment options. Now, for the question of Bitcoin or gold, we first need to examine Bitcoin and Gold individually.
Risks of investing in Bitcoin
When answering the question Bitcoin or gold, we will first examine Bitcoin. Like any other investment, buying or trading cryptocurrency is not without risk. Here are the primary Bitcoin investment risks.
Volatility: Bitcoin is a digital asset whose value is based on sudden drops and rises. This means that you can invest a lot of money in Bitcoin instantly and lose it all within a few hours.
Identity crisis: Does Bitcoin compare to gold or the US dollar? Bitcoin acts as a currency and a commodity. This means that the government can tax Bitcoin like any other commodity. But because it is decentralized, taxation becomes difficult. And being a new phenomenon means that no one knows what its future will be like.
Insufficient regulation: No government or central bank regulates Bitcoin. This explains Bitcoin’s high volatility. If you lose your Bitcoin investment, you have no place to make a claim or file a complaint. Essentially, you lose your hard-earned money forever. Moreover, some people use Bitcoin for illegal activities.
Bitcoin offers various investment opportunities for people who believe in it. Some of these opportunities are more complex than others. Here is one of the common ways to benefit from investing in this digital currency.
Bitcoin mining: You can invest in this virtual currency by mining it. Bitcoin mining requires solving complex mathematical problems. When a Bitcoin miner solves a math problem correctly, a new node appears in the currency software. However, you need specialized skills and software to mine Bitcoin. Bitcoin miners verify transactions on the network before they are added to the blockchain or general ledger.
Trading Bitcoin: You can also invest in Bitcoin by trading it online. The internet has many crypto exchanges where you can buy and sell this virtual currency for profit. All you need is to identify a reputable cryptocurrency exchange and then link it to your bank account. Once you’ve done this, use the fiat money in your bank account to buy Bitcoin through the crypto exchange. Once you have bought Bitcoins, you can send them to your digital wallet where you can hold them, wait for their value to increase, or sell them at the right time.
Buying Bitcoin in person: If you are looking for an opportunity to buy Bitcoin quickly, you can do a face-to-face transaction. However, this approach can be dangerous. This is because you need a lot of money to buy Bitcoin through a face-to-face transaction. Therefore, take precautions when dealing face-to-face with the stranger selling you, their Bitcoins.
In addition to these Bitcoin investment opportunities, you can participate in activities involving this virtual currency. For example, you can start accepting Bitcoin payments in your store. You could also invest in a Bitcoin-based company.
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Risks of investing in gold
We will now examine gold, the second main character of the Bitcoin or gold question. Gold is not a high-risk investment. Historically, it has been considered a haven used to preserve wealth. This explains why gold performs well during periods of inflation or economic uncertainty. Gold is also characterized by a less volatile price movement than other assets such as stocks. It trades at a relatively slow pace, fluctuating in narrow price ranges.
As a result, the return on gold may not be very high compared to other high-risk investments such as stocks, bonds, or cryptocurrencies.
Advantages of investing in gold
Since gold is a commodity and not dependent on the economic situation, it has several major benefits for investors: Hedge against inflation.
Many investors see gold as a solution and hedge against inflation. Since the state cannot create a natural resource like gold, it cannot devalue it as it does with its own currencies.
Security
Perhaps the number one reason for gold’s popularity as an investment option is knowing that its value will steadily increase over the years. Historically, you can see the price drop occasionally. But it always rebounds.
Whether in stocks, bonds or mutual funds, the value of your investment largely depends on their performance. You always must hope that a particular company or sector is doing well. Not so with gold.
Although the current state of the economy affects gold prices, a down economy doesn’t automatically bring gold prices down. In fact, most of the time it does the opposite. When the economy is uncertain, people tend to invest more in gold. This pushes the price even higher.
Portfolio diversification
Many won’t realize it but investing in gold is an excellent strategy for diversifying your portfolio. Even during periods of uncertainty, the gold price performs incredibly well. To stabilize the return on your investment portfolio, it is important to make gold part of the list.
With gold as part of a diversified portfolio, you protect your investments in extraordinary situations. No serious economic depression or stock market crash can wipe out your investments. When the dust settles, gold will probably still be standing.
Protection against possible bad situations
This fear is less when it comes to investing in gold. For example, let’s say we experience a repeat of the 2008 stock market crash. If you only have stocks, bonds, and mutual funds in your portfolio, you would be broke. Therefore, investors see gold as a haven in times of political, financial, or economic uncertainty.
If an investor has invested significantly in physical gold over the long term, they are probably sleeping more soundly. Because he knows that a financial crisis or a global meltdown won’t negatively affect his gold investment. On the contrary, the price of gold normally rises in such difficult times. That’s because more people turn to physical investment when they see that the financial markets don’t offer them bright prospects.
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