If two investment methods at the opposite ends of the spectrum exist, they have to be gold vs. bitcoin.
Gold, a precious metal known as God’s money since ancient times, is obtained from mining the ground and then forging it in flames to become the precious commodity we’ve come to love. Bitcoin and other digital currencies like Litecoin and Ethereum aren’t physical currencies but digital currencies created by computers using complex equations and existing in bits and bytes.
However, these two currencies also share many features. Both gold and Bitcoin have in-built scarcity as their supply is limited. Additionally, investors can opt to mine both currencies, gold physically in gold mines, and Bitcoin digitally using Bitcoin mining companies or your own home computer.
But at this time, in which currency you invest? We take a look at gold vs bitcoin and explore how these two currencies serve varying purposes in an investment portfolio.
Why Should You Invest in Gold?
Gold is one of the safest investments one can make outside of holding cash and bonds in a bank account. This precious metal became a valuable currency during ancient times as it did not deteriorate or rust.
What makes gold a unique investment vehicle is its high liquidity and high scarcity. From gold bars and coins to jewelry, gold is accepted almost everywhere and provides competitive returns in the long term compared to other financial assets.
Built into its longevity is gold’s natural positive performance history as well as its downside protection. Unlike fiat currencies, which tend to inflate over time, gold’s value has remained relatively stable over the years.
However, there is some volatility to contend with when investing in gold. Almost 30% of fund managers polled in the August 2020 Bank of America Global Fund Manager Survey believed that gold was overvalued, which could see its value drop should a recession hit in 2021. To underscore this point, SPDR Gold Shares, a well-known gold ETF, has reported the spot value of gold dropping steadily since August 2020.
Gold should be treated as a safe long-term complement to your portfolio rather than the principal investment instrument.
Advantages of Investing in Gold
- A convenient way to diversify your investment portfolio
- Allows for investment in small amounts, so it is quite affordable
- Easy to liquidate as everyone agrees on its value
- Has strong asset appreciation in long-term
- Offers significant tax benefits as a non-equity product
- Serves as an excellent hedge against inflation
Disadvantages of Investing in Gold
- Banks do not generally buy back gold coins or bars once sold
- Gold ETFs are slightly more expensive than physical gold due to the management fees, brokerage, and other charges that increase the ETF unit’s price
- Gold is not an income-generating asset, unlike real estate or mutual funds
- Gold’s price is dependent on international market conditions
- You may get a lesser amount for your gold when you sell it
Why Should You Invest in Bitcoin?
Bitcoin is a digital currency. It functions on blockchain technology and is an electronic payment system that exists beyond central banks’ control.
Bitcoin was invented in 2009 by an anonymous person or group of people known as Satoshi Nakamoto. Satoshi Nakamoto’s wish was to create a trusted peer-to-peer payment system that removes third-party intermediaries required to conduct monetary transfers.
Bitcoin has since risen in popularity, with more and more investors adopting the currency. It rose to almost $20,000 per coin by December 2017 but dramatically dropped to a mere $4,000 per coin one year later. As of 2020, it stands at approximately $15,000 per coin.
These unpredictable swings in this digital currency’s value make it particularly challenging to store value using Bitcoin. It is yet to be seen whether the crypto world will agree universally on the blockchain system’s stability. Up to now, not everyone can agree that Bitcoin is a currency with a decent amount of liquidity to be used regularly as a means of payment.
Advantages of Investing in Bitcoin
- Provides excellent anonymity and privacy
- Generally attracts lower transaction fees
- Increasingly gaining wide acceptance as a payment method
- International transactions are much easier
- Completely independent from government and political agents
- Has in-built scarcity, which increases its value with time
Disadvantages of Investing in Bitcoin
- Attracts black market investors and transactions, which may damage its long-term value
- Still very volatile, which could lose you money fast
- Technology does not support chargebacks and refunds
- Vulnerable to digital scams and fraud
Gold vs. Bitcoin – Where Do They Fit in Today’s Investment Portfolio?
Bitcoin and other digital currencies, unlike gold and precious metals, are relatively new investment vehicles. In the last decade, Bitcoin has emerged as an investable currency. It is also seen as a complement to and possible replacement for cash.
However, it has never been stable and has in-built volatility. Several so-called “stable” cryptocurrencies or “stable coins” like Tether have emerged in recent years.
These coins are linked to the U.S. dollar and have grabbed investors’ attention who are looking to invest in something less volatile than Bitcoin. Interestingly, this defeats the original aim of Bitcoin, which was to be an independent currency.
Gold, however, has been the standard on which cash currencies and their stability have been measured for centuries. The gold standard is a monetary system that links a nation’s currency or paper money value to gold. This fixed-price quality determines the value of the currency.
Take, for instance, the value of the dollar. If the U.S. sets the gold price at $500 per ounce, the dollar’s value would be 1/500th of one ounce of gold. However, there are no countries currently using the gold standard—the U.S. partially abandoned it in 1933. By 1973, it replaced it with fiat money, a term that describes currency issued due to a government’s order or a non-negotiable means of payment.
Therefore, for the foreseeable future, Bitcoin and gold have a place in modern investment portfolios as each such serves to prop up the portfolio differently. What’s more, a range of investors have adopted both, and they don’t seem to be going away anytime soon.
What’s hard to deny is that both currencies have a baseline value that investors accept. Gold is a component in luxury goods like jewelry and specialized industries like electronics, cosmetics, and dentistry. Similarly, Bitcoin, riding on blockchain technology innovation, offers millions of people worldwide a chance to transact without needing traditional banking infrastructure and credit. With Bitcoin, these underserved individuals can anonymously send money across the globe for a minimal fee and without the restrictions imposed by central banks and governments.
Another interesting factor is that both gold and Bitcoin are scarce. Bitcoin’s halving and reduction in its mining reward ensure that all 21 million coins will be circulated by 2140. Similarly, while we do not know how much gold is in the Earth, it is becoming increasingly hard to find, and investors have begun looking at asteroids and other outer space entities as a source. If you’re considering buying gold vs. bitcoin, you should consider the following factors to understand each currency’s advantages and what role it can play in your investment.
You should ask yourself:
- How easy is it for you to liquidate gold?
- Will crypto competition from emerging stable altcoins hurt the value of Bitcoin?
- What makes each currency appeal to you?
- How stable or volatile do you prefer your investments to be?
- Does investment anonymity with gold vs. bitcoin matter to you?
Whether gold or bitcoin is a better investment depends mainly on your long-term goals.
If you are not opposed to riskier investment strategies, Bitcoin is a more suitable investment for potential short-term gain. However, be aware that there is considerable potential for losing a lot of money—Bitcoin has never been a stable currency, with sizeable value fluctuations sometimes within days.
Gold, however, is a proven stable investment that sees a return on dividends over the long term. Gold, like land, is a limited resource, which gives it enduring value. It is an investment that guarantees a return if you are a patient investor.
What are your thoughts on investing in gold or bitcoin? What type of investment suits your persona and goals better? Are you a traditionalist that would rather stick to the known or an adventurer eager to explore emerging investments?
We’d love to hear from you, so please leave a comment below. And if you’d like solid advice on investing in gold, were here to help. Contact us today with your questions, and our friendly team will get back to you promptly.