Last updated on December 1st, 2021 at 06:49 pm
Recently, many institutional and retail investors alike have aped into cryptocurrencies, especially Bitcoin. Many argue that Bitcoin is a hedge against inflation and better than the traditional safe-haven asset like Gold. The emergence of Bitcoin as a store of value has gotten many debating whether they should buy Bitcoin or stick with a conventional asset like Gold.
This article will discuss Bitcoin and Gold, their differences and similarities, long-term prospects, and why you should consider buying both for diversification.
Let’s dive in!
Can Crypto Completely Discard Traditional Stores Of Value Like Gold?
Cryptocurrencies like Bitcoin have been described by many as digital Gold. As per the Bank of Singapore, a private banking arm of OCBC Bank, cryptocurrencies can partially replace Gold as a store of value. However, while this can potentially be true in the future when cryptocurrencies and the market matures, currently, this comparison seems to be flawed because of the following reasons:
- High Volatility – The crypto market is notoriously known for flash crashes that see millions of dollars of market capital being wiped out within days.
- Lack of regulatory clarity and acceptance – Regulators worldwide haven’t yet been able to develop a uniform stance on cryptocurrencies, and thus, there’s no clarity on whether countries will legally accept crypto.
- Reputational risks – The value of anything depends largely on its acceptance by the general public. If the crypto market continues to be volatile and prone to hacks and scams, it’s possible that the people only use it as a speculative asset class rather than genuine usability.
As per Mansoor Mohi-uddin, the chief economist at the Bank of Singapore, Bitcoin has the potential to become a safe-haven asset in investors’ portfolios and could be used as an asset for diversification if:
- The liquidity concerns can be addressed as this will help reduce the volatility of the market.
- Trustworthy institutions can help investors hold digital currencies securely.
Comparing all cryptocurrencies with Gold is not fair as the two assets are very different, at least now. While Gold is considered to be one of the safest stores of value as it has physical properties and a limited supply due to which its value stays consistent over a period, cryptocurrencies, on the other hand, can be volatile and many like Dogecoin have an infinite supply, meaning that they can be created on-demand. Currently, the only cryptocurrency that can compare to Gold in terms of being a store of value is Bitcoin which is different from cryptos like Dogecoin and has a limited supply.
However, it’s fair to say that cryptocurrencies are far from discarding a traditional store of value like Gold. Thus, people should avoid blindly trusting crypto as a safe haven asset and not hold all their capital in the form of crypto as it’s quite unstable, and if people don’t manage their emotions well, they could deplete all their savings.
Should You Buy Bitcoin Or Gold For The Long Term?
Traditionally, Gold has been everyone’s go-to safe-haven asset, and this has been the case for hundreds of years because of the following reasons:
- Gold can be used as a material for consumer goods like jewelry and thus has real-world use cases and has value as an asset.
- Since Gold cannot be manufactured or printed, its supply remains limited and low compared to the demand.
- While Gold used to be tied to the US Dollar until 1971, as President Nixon used the Gold standard, the asset no longer correlates with any other asset like fiat or even stocks. Thus, it has been used by many investors as a hedge against the stock market swings and corrections.
- When there are market corrections, it has been seen that the Gold performs well. Even if the value of Gold does not necessarily rise during such times, it does not go down as well, which is seen as a beneficial characteristic by investors as it’s helpful to have an asset that holds its value while others decline.
“For gold, it has over 5,000 years of history on its side and isn’t going anywhere, which means it is super safe,” says John Carter, founder of Simpler Trading. Unlike Gold, Bitcoin has only been around for slightly more than a decade, and thus, it’s fair to say that it hasn’t yet lasted the test of time. However, Bitcoin has many characteristics that are similar to Gold and then some. Like Gold, there is a limited amount of Bitcoin. Here, Bitcoin goes one step ahead in being a rare asset as it has a fixed supply of 21 million Bitcoin. This means that there can only ever be 21 million Bitcoin, whereas it is always a possibility that we can find more Gold. Moreover, as Bitcoin’s price surged from less than $4,000 to $20,000 back in 2017, one ounce of Gold started to be worth less than 1 BTC, and Bitcoin has continued to outperform Gold every single year since 2011.
Both Bitcoin and Gold offer value to investors. Thus, if you’re looking to invest long-term, you should consider allocating some capital to both assets for diversification. – Not Financial Advice
Here’s Why Both Bitcoin and Gold Are Good For Diversification
When it comes to choosing between Bitcoin and Gold for long-term investment, experts have different opinions. However, one thing that they all agree on is the fact that investors should use both assets as a means to diversify their portfolios or as a hedge against fiat currency inflation that is currently being seen across economies around the world due to the unsustainable fiscal and monetary policies in use.
Billionaire investor, Ray Dalio who has long been a gold bull and has used it to add balance to his portfolio as it has both risk-reducing and return-enhancing qualities, revealed in May that he owns an undisclosed amount of Bitcoin as he believes “There are certain assets that you want to own to diversify the portfolio, and bitcoin is something like a digital gold.”
Let’s take a look at why both Bitcoin and Gold are good for diversification.
- No one is making any more of Bitcoin and Gold – Both assets have a limited supply, and thus, unlike fiat currency, no government can decide just to print more for ‘economic benefits’.
- Difficult to counterfeit – Gold and Bitcoin have unique properties, and thus, while many assets come close to having similar properties, they can copy neither Gold nor Bitcoin. Well, one might say that Bitcoin can be replicated easily since the code is open-source. While that is true, and you can create your own Bitcoin in minutes, what you cannot mimic is the network effects and acceptance of Bitcoin worldwide, which has even seen it being accepted as a legal tender in El Salvador.
- Hedge against inflation – While Gold has traditionally been seen as a go-to safe-haven asset, Bitcoin is quickly gaining acceptance as the best investment for hedging against inflation.
In Conclusion…
- Bitcoin has become an increasingly popular asset to own among both retail and institutional investors. It is quickly gaining acceptance both as a store of value and as a hedge against inflation. However, there’s still a long way to go before it trumps Gold and becomes a safe-haven asset for every investor.
So are you investing in an emerging asset like Bitcoin or an age-old store of value like gold? Which asset do you think will perform better in the future?
Comment below and let us know more!
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