By Brian Nibley
In conversations around portfolio diversification, the merits of Bitcoin vs. gold has become a topic of much debate among investors. The question itself is problematic, implying that one asset is categorically better than the other for all investors.
There are different factors to consider for each, and depending on someone’s risk tolerance and financial or technical knowledge, they may choose to hold gold, Bitcoin, or both. It’s largely a personal decision and any statements made here regarding future price potentials are only estimations based on past trends. Past performance does not indicate future results.
Is It Better To Invest in Gold or Bitcoin?
There’s nothing preventing investors from holding both gold and Bitcoin in their portfolios—after all, the concept of portfolio diversification allows for spreading your money across a variety of different asset classes.
Some investors might want to hold gold as a safer haven (though gold can still lose value) while holding Bitcoin for a chance at outsized gains and additional liquidity (with the knowledge that investing in crypto is as risky as gambling in a casino).
The decision to invest in one or both of these currencies is individual, and may depend in part on a person’s risk profile. For example, someone risk-averse may not be inclined to invest in Bitcoin because it is so volatile. Whereas an investor with a higher risk tolerance may consider the risks of volatile crypto to be worth it. Alternatively, some investors may choose not to invest in gold or Bitcoin.
Bitcoin vs Gold: Pros and Cons
Bitcoin has two clear advantages over gold: liquidity and potential for price appreciation.
And gold has two clear advantages over Bitcoin: an established history and lower volatility.
Here we’ll examine some of the most important pros and cons of investing in Bitcoin vs gold.
Bitcoin’s volatility is legendary. The cryptocurrency has been known to rise or fall by 10%, 20%, or even 30% in a matter of hours or days. Few other assets, aside from penny stocks, see anywhere near this kind of volatility.
Gold, while still seeing some volatility at times, tends to have a smoother ride in the markets. Investors largely see gold as a safe haven, “risk-off” asset. If gold moves more than 1% or 2% in a day, it’s usually considered significant and rare.
Gold has a 5,000-year established history of serving as a store of value. This gives many investors confidence in the yellow metal. Throughout generations and across cultures, gold has universal recognition as a form of money and has been a proven way to store and preserve wealth. Investing in precious metals is generally a relatively safe bet.
Bitcoin was created in 2009. That gives it a little more than 12 years of history as of the time of this writing. The blockchain technology that underlies the Bitcoin network is just as new, and no decentralized peer-to-peer network like Bitcoin has ever existed before.
Over its lifetime, Bitcoin has risen from a fraction of a penny to over $50,000 at the time of writing in late April 2021. There may not be any other asset in history that can boast those kinds of returns on such a short time frame.
However, the youth and novelty of the Bitcoin network gives some investors pause. There are some unpredictable variables, such as how governments might respond to this new form of money largely outside of their control. Will Bitcoin be criminalized, heavily taxed, or otherwise regulated out of existence somehow?
How might the network respond to a major, global cyberattack? What happens once Bitcoin has been fully mined, and miners only have transaction fees to incentivize their work, rather than the block rewards of newly minted coins?
These and many other questions create too great an uncertainty for some investors.
On the other hand, some Bitcoin proponents claim that Bitcoin will one day replace gold altogether due to the advantages that a scarce digital currency has in today’s increasingly virtual world.
Gold is considered a liquid asset. To get liquidity out of gold, it has to be sold for the fiat currency of an investor’s choice. This process may be cumbersome and usually involves either taking the physical gold to a coin dealer or selling gold to a private party via the internet, for example, through an online auction house.
While some investors might see this as a con, others might see it as a pro. You might be less likely to spend money saved in gold coins than money saved in cash or bitcoin, which could be a good thing for those looking to curtail their spending habits.
By nature of being virtual, Bitcoin is quite liquid. Crypto markets trade 24/7, every single day of the year. Users can access their wallets from anywhere with an internet connection.
Exchanging Bitcoin for fiat currency is quick, cheap, and easy. In some cases, exchanging for fiat may not even be necessary. A growing number of businesses, organizations, and individuals have begun accepting Bitcoin as a direct form of payment.
Additionally, Bitcoin loans provide the option for using Bitcoin as collateral for a fiat currency loan, creating even more liquidity options.
Gold is a physical commodity that has a scarce supply. No one knows exactly how much gold lies in the Earth’s crust, but it stands to reason the amount is finite. The process of mining and refining gold is difficult and takes time.
Bitcoin is a digital commodity that has a fixed supply. There can only ever be 21 million bitcoins mined into existence, as per the Bitcoin protocol.
Will Bitcoin Be Worth More Than Gold?
At the time of writing, the market cap of Bitcoin is about $1 trillion. The market cap of gold is estimated to be about $10 trillion. That means Bitcoin would have to rise by a factor of roughly 10x before reaching parity with the market for gold.
While such a thing may sound fantastic, it’s not out of the realm of possibility. Five years ago, the market cap of Bitcoin was only $7 billion. At $1 trillion, Bitcoin has grown by a factor of almost 50x during that time.
If recent trends were to continue, it could be possible that Bitcoin reaches or exceeds the market cap of gold in the years to come.
Is Bitcoin a Good Investment?
In terms of returns, Bitcoin has been the best-performing asset of the last 12 years by a wide margin. Bitcoin has also been the best-performing asset nearly every year since its creation (with the exception of 2014 and 2018).
However, when mentioning Bitcoin’s impressive gains, one must also mention the extreme volatility Bitcoin has also experienced, along with the exchanges that have been hacked, and stories of people losing the private keys to their Bitcoin forever. These risks are worth paying attention to.
Bitcoin tends to show a strong correlation to the increase in the money supply. As a central bank creates more currency, the price of Bitcoin measured in that fiat currency tends to rise in lockstep. This is thought to happen as a result of supply and demand.
There are only 21 million bitcoins that will ever exist, while there are an infinite number of fiat currency units like dollars being created. More and more dollars chasing fewer and fewer bitcoins can lead to a dramatic yet predictable outcome for prices.
Is Gold a Good Investment?
Long-term investors might consider gold a good investment, thanks to its low volatility and longevity. It’s a relatively low-risk investment. Generally, gold appreciates in lockstep with inflation, which is why it is considered a safe asset. But gold’s very stability may make it less desirable for short-term investors who hope to turn a quick and hefty profit.
There are many nuances to the gold vs. cryptocurrency debate, but it’s important to remember that it doesn’t have to be a debate at all—investors are free to choose both. The real decision might be in choosing what percentage of a portfolio to allocate to each asset to maximize returns and minimize risk. And as always, those decisions depend on the individual investor.
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