The stock market has moved to record highs in recent years, with stock valuations higher than ever. Many suggest that the market has become overbought and is primed for a correction, leading many investors to look into diversification through other asset classes.
Two of the most talked-about targets for this diversification are gold — a classic precious metal that has acted as a safe haven throughout much of recorded history — and Bitcoin (BTC), the most valuable of cryptocurrencies, which some refer to as “digital gold.”
Due to its popularity, many investors see Bitcoin as stiff competition to the classically held yellow metal. But which is the better investment?
Bitcoin vs. Gold – Key Investment Differences
Gold and Bitcoin are obviously two very different investment assets. Gold has been a prized physical commodity since ancient Egyptian times, whereas Bitcoin is a digital asset that didn’t come into existence until its creation by the pseudonymous Satoshi Nakamoto in January 2009.
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There are major differences in how each asset derives its value; the volatility, liquidity, and supply of the two; and vast differences in safety and transparency. Here are some key factors to consider when deciding whether you’re going to invest in gold or Bitcoin:
There’s no question that the value of Bitcoin has outpaced that of gold over the past year, with the cryptocurrency flying from around $30,000 to around $50,000 through 2021, and gold actually losing value throughout the year.
However, this trend isn’t likely to be sustained for the long-term. It’s important to understand how the value of these assets are derived when making a long-term investment decision.
Bitcoin’s value is an interesting concept because its value is derived from hype. Bitcoin is an exciting investment because it promises independence from central banks, because of the blockchain and the incredible things that technological innovation can make possible, and because of the massive gains early adopters of Bitcoin and other cryptocurrencies have generated in recent years.
Sure, it’s all hype, but that investor excitement is real and has led to real value!
Investors know that Bitcoin has a finite supply, and the hype surrounding the cryptocurrency has led to some massive companies deciding to accept it as a form of payment. It’s possible that this trend will continue, and if it does, demand for Bitcoin will grow. The law of supply and demand suggests that the value growth seen to date has the potential to continue for some time.
When it comes to gold, there’s really no hype to speak of. Sure, the gold bugs — people who promote gold as an investment — often point to a world where the financial skies are falling, so everyone needs to duck and cover and buy gold. But these doomsday theories don’t do much when it comes to changes in the value of gold.
Gold’s real value is derived from a few easy-to-track factors, all relating to supply and demand. The most important of these factors include:
- Market and Economic Conditions. When market and economic conditions are positive and expected to continue well, investors tend to ditch gold to free up funds to invest in equities. During these times, the price of gold tends to head downward or remain flat. On the other hand, when broad economic and market conditions are concerning, investors may ditch equities and jump into safe-haven investments like gold, increasing demand, and therefore price.
- Utility Demand. Physical gold isn’t just an investment — it has utility. Gold is a metal most commonly used in jewelry, but also has its place in some technological components and other commercial and industrial products. As demand for gold-related products increases, so too does its value. However, when demand for these products weakens, gold prices tends to fall.
- Inflation. Gold has long been viewed as a hedge against inflation. Therefore, when inflation is high, investors tend to pile into gold as a way to protect the value of their portfolios, leading to an increase in the commodity’s value.
Volatility relates to the short-term price movements in any financial asset. The metric doesn’t point to whether the price of the asset is moving up or down, instead, it focuses on how fast the asset price tends to move in one direction or another.
Therefore, high-volatility assets come with increased risk while low volatility means prices move at a slow, more predictable rate. Here’s how the two assets stack up in terms of volatility:
Bitcoin is easily one of the most popular alternative investments in the world, but it’s also a high-volatility asset. When the digital currency’s price is up, it’s usually up dramatically, but downturns have the tendency to be just as dramatic.
The uncertain future of this relatively new asset, both from regulatory and adoption perspectives, leads to additional volatility and risk with Bitcoin and other cryptocurrencies. In fact, there were multiple issues in 2021 that sent Bitcoin’s price tumbling.
In June 2021, CEO Elon Musk announced that Tesla would suspend payments with Bitcoin after earlier announcing the company would accept it, bringing the price of BTC back down to earth. In September of the same year, China cracked down on cryptocurrency, banning the use of most crypto assets and leading to significant declines in Bitcoin and just about every other cryptocurrency (altcoin) on the market.
As a result of these dramatic declines, the cryptocurrency is still working its way back to highs achieved in April 2021, when BTC broke the $60,000 mark. With that in mind, there’s no question that the high level of volatility seen in Bitcoin brings significant risks to the table.
Gold, on the other hand, is known for minimal volatility. In fact, central banks, institutional investors, and other big-money players in the market commonly use gold as a way to add stability to their portfolios. When gold prices are on the move, they’re not likely to move much.
Liquidity is also an important consideration when making any investment. After all, when it’s time to exit your position, it’s important to know that someone is ready and willing to buy your assets from you. If not, you could be left holding assets that you’re not interested in keeping.
At present, liquidity is similar between Bitcoin and gold, but that has the potential to change in the long run. Here’s what you should think about:
When you talk about Bitcoin, you’re talking about one of the most in-demand digital assets in the world. No matter what the price is, chances are that there are countless investors ready to buy your coins if you’re selling them.
So, at the moment, there’s a slim chance that you’d get stuck in your investment.
However, as mentioned above, the digital currency’s survival is largely dependent on hype, regulatory acceptance, and adoption. There’s no telling whether these factors will all hold up for Bitcoin in the long run. There’s a possibility, albeit a small one, that liquidity could become a problem in the future if people stop trading Bitcoin, whether through changes in the laws or lack of interest in the future.
There’s always someone ready and willing to buy gold. Ultimately, the precious metal is in short supply, and demand is just about always there. This is helped out by gold’s commercial and industrial utility — even if investors were to stop trading gold as an asset, there’s a robust marketplace for the commodity that isn’t going anywhere for the foreseeable future.
So, if you have gold in your portfolio, and you decide it’s time to offload your holdings, you shouldn’t have any issues doing so.
Supply is important because it’s half of the supply-and-demand equation that determines an asset’s price. Both of these investment options are of limited supply, but the source of the supply between the two is actually very different. Here’s why:
Bitcoin is “mined” — meaning new coins are created and enter the marketplace — by computers using their computing power to solve incredibly complex mathematical tasks. When creating the cryptocurrency, Satoshi Nakamoto capped its supply at 21 million coins. This means that once all 21 million coins are in circulation, there will never be another Bitcoin minted.
This was done on purpose.
Knowing that supply and demand is a leading driver of price, Nakamoto limited the supply of his invention to ensure its value and control inflation issues that arise with currencies of unlimited supply.
Gold is also of limited supply, but there’s a big difference. Gold is mined from the earth, and every once in a while, new deposits of gold are found.
Of course, the new deposits are never enough to feed the world’s demand for the commodity, but there’s no specific cap on the supply of gold. It’s possible that the world’s largest deposit of gold could be found tomorrow, leading to an explosion of supply and a reduction in price.
Safety and Transparency
No matter what asset you’re investing in, safety and transparency of your investment should always be considered. Here’s how these two assets stack up:
Bitcoin Safety and Transparency
While some investors view Bitcoin as a safe investment option due to the perceived security of the blockchain, there are significant risks that should be considered. From an investment perspective, high levels of volatility are anything but safe.
In addition, when investing in cryptocurrency, there’s a larger responsibility placed on the investor to protect themselves from criminals, because there are no banks or other authorities to appeal to if your funds are stolen or someone gains unauthorized access to your account.
Cryptocurrencies are stored in digital wallets, and a blockchain ledger is used as a transparent way to verify ownership. However, with a decentralized wallet, your key to access your wallet is your responsibility, and it must be stored in a safe place. There’s no “forgot my password” button to rely on here. There are horror stories of people losing a fortune in Bitcoin because they lost their key or login credentials.
Cryptocurrencies are also a hotbed for scams due to the general lack of regulation associated with them. As a result, it’s important for investors in these assets to be aware of and always on the lookout for fraudsters in order to protect themselves from theft.
Gold Safety and Transparency
Gold is a far safer investment option, both from the investment perspective and from the protection-from-criminals perspective.
From an investment perspective, gold has long been seen as a safe haven and a strong store of value that works perfectly as an inflation hedge. That means that when fiat currencies like the U.S. dollar (USD) are headed upward, gold tends to rise as well, ensuring that spending power isn’t lost. It’s these properties that lead many experts to suggest all investors should have some allocation to gold in their portfolios.
From a security perspective, gold is also the safer bet. Physical gold can be stored in a safe in your home or off-site by a third party. Moreover, as a physical asset, it’s not at the mercy of cyber criminals that want to dig their fingers into your portfolio.
Paper gold, like gold ETFs, are heavily regulated investments, making it difficult for con-artists to tap into what’s yours. So, from a safety and transparency standpoint, gold is clearly the safer play.
The Verdict: Should You Invest in Bitcoin or Gold?
This is a difficult question to answer, and only you can answer it for yourself based on your goals, risk tolerance, and strategy. Nonetheless, here’s a guide that will help you make that decision.
You Should Invest in Bitcoin If…
Bitcoin is a better fit if you’re a young investor with a love for technology who’s willing to take risks in order to generate significant returns, and if you believe that blockchain technology will result in big things in the future. You may be an ideal candidate for an investment in Bitcoin if:
- You Are a Risk-Taker. Bitcoin comes with significant risks, including increased volatility, the possibility of irreversal loss or theft, and regulatory uncertainties that can lead to major problems in the future. However, if all goes well, accepting these risks also has the potential to result in jaw-dropping gains.
- You’re a Young Investor. At this stage, cryptocurrency of any kind doesn’t quite fit into a retirement portfolio, especially if you’re nearing retirement age. If the price of these assets takes a dive, middle-aged and older investors may not have the time needed to recover, dampening their retirement funds. Young investors, however, have time on their side to take a flier on some high-risk, high-reward investments.
- You’re a Blockchain Believer. Many believe the blockchain will solve major problems in business, contracts, and industries like finance, health care, and gaming. Investing based on utility is much like investing in a stock in the beginning phases of a product rollout. If you believe in the product, it may be a good fit as long as you practice restraint and don’t risk too much of your portfolio on a speculative bet.
You Should Invest in Gold If…
Gold is a better fit if you’re a slow-and-steady investor looking to add stability to your investment portfolio., or if you’re nearing retirement or simply a risk-averse investor who’s not into taking big chances. You might be the perfect candidate for an investment in gold if:
- You’re Middle-Aged or Older. The closer you are to retirement, the more stable your portfolio should be. If you’re middle-aged or older, adding gold to your portfolio may just add the stability you need to ensure your golden years are golden.
- You’re Risk-Averse. There’s no shame in being risk-averse. If the idea of taking a dramatic short-term loss and hoping to bounce back is too much for you to stomach, gold is the better bet for you.
- You Want to Take a Traditional Approach. Unorthodox investing in and of itself is uncomfortable for some investors. They’d rather build their retirements the way their parents and grandparents did — and once again, there’s no shame in that. If you’re more into taking the tried-and-true approach to building your portfolio, gold is the way to go.
Both Are Great If…
Both Bitcoin and gold are excellent options if you want safety in your portfolio but would also like to mix in some cryptocurrency diversification. Perhaps you don’t want to rely too heavily on a new technology, but you don’t want to miss the boat either. Consider a mix of the two assets if:
- You’re Curious About Bitcoin. If you’re curious about Bitcoin with all the news surrounding it, and you think there’s got to be something to the crypto industry and don’t want to miss the boat, consider dabbling in Bitcoin while also holding gold. You don’t have to dive in head first.
- You Want to Balance Risk. Say your curiosity has you ready to invest in crypto, but you want a way to offset the risk. That’s where the gold comes in, acting as a hedge against losses while still letting you participate in Bitcoin’s potential upside.
- You’re Younger. Even if you’re offsetting Bitcoin with gold, cryptocurrency at its current stage is still too risky for those nearing retirement. The younger you are, the more you can afford to consider investing some in Bitcoin.
Both Bitcoin and gold are compelling investment options with their own strengths and weaknesses.
Gold is the slow, steady way to go about growing your funds outside of the equities market, while Bitcoin comes with the potential to generate significant gains. On the other hand, gold adds stability to most portfolios, while cryptocurrencies — even the best among them — will generally add risk.
Ultimately, the decision to add one or the other to your portfolio is completely up to you, but it’s important to do your research and consider the risks before diving into either.