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Gold Vs. Bitcoin — What’s the Better Investment?

by May 7, 2021Investment Strategy, Market Insights

When comparing gold vs bitcoin cryptocurrency, what is the better investment?

Bitcoin is being touted as “digital gold” by crypto advocates trying to position the popular cryptocurrency as an alternative to the precious metal. But does Bitcoin deserve this title? Let’s take a look at the proven benefits of gold and see how Bitcon stacks up against them. And I promise to be as objective and fair as possible. 

Function as currency

Gold functioned as currency for thousands of years in addition to it being a store of wealth. It means that people were not only storing their wealth in gold but were using it as their currency to barter and exchange goods and services for gold. This dual purpose use of gold lasted up until 1933 when President Roosevelt ordered that printed US dollars backed with gold held by the Federal Reserve would become our only currency. 

While gold is considered a safe-haven asset and a store of wealth, today it’s justifiably not an ideal currency. Today’s global commerce requires quick digital transfers of currency from one part of the globe to another, which gold cannot do well, but Bitcoin can. If we ignore the high transaction costs associated with completing a Bitcoin transfer due to the way it’s generated (which just means that Bitcoin is not an ideal currency) when comparing Bitcoin to gold in their ability to function as modern currency, Bitcoin wins.

Protection against inflation

Bitcoin and gold both have significant advantages over fiat currencies, such as the dollar, because neither can be diluted or debased. You can’t print either of them, and they are created in specific ways. 

Bitcoin is being “mined” — the term used for how it is being created via software — and it’s designed so that only a finite amount of 21 million Bitcoin will ever be available by 2140, so you cannot just “mine” Bitcoin indefinitely, nor can you produce it by any other means.

This is somewhat similar to gold — probably one of the reasons why Bitcoiners borrowed the term “mining.” Gold cannot be “created”; it can only be mined, and only a finite amount will ever be available — it’s estimated that only 20% of total gold on Earth is left to be mined.

So, unlike the dollar, neither gold nor Bitcoin can be debased by central bankers, which is important when you consider protection from inflation, but the creation process is not enough — you need to also consider their history and track record.

At this time, there is only one asset that humans have used for 5,000 years as a store of wealth that has a finite quantity, and it’s gold. It has a proven history of being an inflation hedge, whereas Bitcoin does not have any history with inflation since it’s a recent invention and has only existed in low-inflation times. 

When you want to protect your portfolio from inflation, you should take no risks. While there’s only a finite amount of Bitcoin available, one risk with Bitcoin is that there are thousands of similar cryptocurrencies on the market, and the infinite number of cryptos could dilute the wealth of anyone trying to protect themselves from the ravages of inflation. Bitcoin has a long way to go and has yet to prove its worth before it can be considered as a known store of wealth.

So when it comes to protection against inflation, gold wins.

Correlation with stocks

The key to a successful portfolio is diversification with assets that are uncorrelated (their price movements aren’t tied to each other) or inversely correlated (their price movements are tied to each other, but they tend to move in opposite directions). Most portfolios contain a large portion of stocks, and to truly diversify you’ll want to allocate a part of your portfolio to assets that either don’t go down with stocks or go up when stocks go down.

Gold is considered to be inversely correlated with stocks, so the precious metal protects against stock market corrections and crashes. We go into detail about this and other benefits of gold as an investment here.

In the 10 years of its existence, Bitcoin has been largely correlated with stocks — notice in the chart below how Bitcoin (blue line) and the S&P 500 (which is an index of the 500 largest publicly traded US companies; orange line) ebb and flow together.

The correlation between bitcoin and the stock market is tight - when the market goes down, bitcoin typically goes down too, unlike gold investing.

Bitcoin is also tightly correlated with the Russell 3000 index, which tracks the performance of the 3,000 largest US-traded stocks, representing about 98% of all US incorporated equity securities.

This tells a story that Bitcoin is more of a speculative asset (like stocks) than a safe haven (like gold), so if you are looking to speculate, by all means go Bitcoin, but investors who put money into Bitcoin thinking that it is “digital gold” and that it will protect their portfolios against stock market corrections might wake up to the realization that not only did Bitcoin not protect their investments, it dragged them down even further.

When choosing an asset to truly diversify and protect your portfolio against stock market corrections, gold wins.

Third-party risk

Gold has absolutely no third-party risk. This is gold’s claim to fame. It has no debt attached to it. It simply exists. You can hold it — it’s yours. Like the home you own, it cannot default, and no CEO can embezzle it away from you. 

Bitcoin, on the other hand, is exposed to some of the risks that affect assets like stocks and bonds: it exists only digitally and therefore carries a system risk. It needs the computer network to be transferable and carry value, which means Bitcoin is at risk if its network is hacked or goes down. For instance, if a solar flare wipes out the electric grid, Bitcoin is wiped out. Gold is not. 

Gold wins this round.

Government intervention

Both gold and Bitcoin are threatening the fiat currency order and are competing with your dollar-denominated assets like cash, stocks, and bonds. Theoretically, gold could be banned, banished, or made inaccessible by governments. But it’s highly unlikely. Why? Because central banks, including the Federal Reserve, are holding huge amounts of gold as their main reserve asset since it carries no third-party risk. 

Think about it in the most simple way possible. Central banks bought gold, and they will need to sell some of it from time to time. They need a robust gold market to easily liquidate huge gold holdings when they need to, so rest assured that they will not allow that market to be disrupted, which means that gold as a store of wealth will never be banished. Even if a specific government would ban further acquisitions of gold, the precious metal will never lose its value, and neither will your gold holdings.

The case is much less theoretical for Bitcoin. The reason Bitcoin is considered a much bigger threat to governments is that the cryptocurrency is a better potential currency than gold, as we discussed, because it’s much easier to transfer than gold and can power credit cards. At the same time, no central bank will buy and hold Bitcoins because it does have a systematic third-party risk of relying on a computer network. 

All this means that Bitcoin presents all the pain but none of the pleasure that gold provides to central bankers and governments, so it is my opinion that governments are unlikely to ever allow for it to reach a point where it could rival fiat currencies and destabilize the financial sector.

In fact, governments are experimenting with their own cryptocurrencies, and they would want their currencies to overtake any competing, non-governmental competitor.

The cryptocurrency field is yet to be tightly regulated (like other currencies or even commodities are), but once — or if — Bitcoin and other cryptocurrencies start to become mainstream and rival the dollar, it’s just a matter of time before regulators step in to protect both their own interests and those of consumers. 

For long-term retirement savers, potential government intervention presents additional risks. There is a possibility that Bitcoin could one day cease to exist through hostile legislation — some Bitcoin derivatives have already been banned, and companies who have attempted to start their own cryptocurrencies have been prevented from doing so, including Facebook. That is a clear sign that the government is keeping a close eye on the industry.

Because central banks have a strong interest in a viable gold market to serve their needs, gold is safe from government intervention, so in this category gold wins.

Liquidity

Gold is recognized and accepted worldwide, and you can easily buy and sell it. In fact, buying or selling gold can be done more or less immediately, typically within hours. If the gold is part of a Precious Metals IRA, you can also take distribution and choose to liquidate and receive cash or receive the actual coins and bars themselves, While you cannot use gold as direct payment for goods and services, you can easily convert the metal into cash. There is always a buyer for your gold.

Bitcoin is highly liquid as well, and you will need to use dedicated exchanges to trade the cryptocurrency. You can also use a Bitcoin ATM to convert Bitcoin into cash or, in some cases, purchase Bitcoin, but these ATMs are hard to find. Some stores and online retailers accept Bitcoin as payment, but this is not very common yet.

For liquidity, and for the peace of mind knowing you can liquidate your holdings at any time, I would say it’s a tie.

Intrinsic value

Gold has value not just as an investment asset but also as an important material in many industries, not to mention in jewelry. Gold is an element — there is and will always be only one gold.

Bitcoin gained its popularity and “brand recognition” because it was the first cryptocurrency. It has no intrinsic value — it exists purely in digital form. And there are thousands of other cryptocurrency just like Bitcoin, so while Bitcoin is the most popular cryptocurrency, it isn’t necessarily the best one and definitely not the only one, so it faces stiff competition.

A clear victory for gold because of its solid intrinsic value.

Volatility and risk

Bitcoin’s price movements are erratic. Just take a look at the chart below to see the extreme price movements of Bitcoin compared to gold as reflected in the weekly percentage change (orange line = gold; blue line = Bitcoin).

The weekly percentage changes in the price of gold vs bitcoin show that gold investing is much more stable than bitcoin.

Bitcoin is subject to market whims and news. For instance, it jumped almost 20 percent within one hour of Elon Musk of Tesla fame changing his Twitter bio to #bitcoin, and a rivaling cryptocurrency, Dogecoin, soared 60 percent after Musk and Mark Cuban, owner of the Dallas Mavericks, endorsed it on social media. However, Bitcoin hasn’t only seen big movements upwards: Several times just in the first few months of 2021, the cryptocurrency dropped 10 percent or more and has suffered several drops accumulating to about 70% in its short existence.

Gold, on the other hand, is much more stable, as seen in the chart above. That’s one of the reasons investors trust it to diversify and protect their portfolio against volatile assets, such as stocks. Here’s the challenge in scoring this round: If you want growth that comes with high volatility and risk, Bitcoin beats gold. For life and retirement savings management gold’s price stability and the fact that it has no alternatives make it a strong store of wealth and the winner in this category.

Security

Gold had thousands of years to create an established system for trading, weighing, and tracking authenticity. It’s very hard to steal gold, to pass off fake gold, or to otherwise corrupt the precious metal. And you have control over how your metals are stored — you can choose to store them in a depository, which is fully secured and insured to achieve maximum security.

The picture is quite different for Bitcoin. While the Bitcoin network cannot be hacked to the best of our knowledge at this time, where the Bitcoins are stored can. For instance, a popular exchange went offline in 2014, and 850,000 Bitcoins (worth $450 million in 2014 or almost $50 billion today) disappeared. Legally, there are few consequences for such behavior as Bitcoin remains difficult to track with any level of efficiency.

In terms of security, we believe gold is safer.

Rarity

Both gold and bitcoin are rare resources. Why is rarity important? If the supply is limited, prices increase, especially when demand keeps increasing as well. 

In the case of gold, there will always be investment and industrial demand, but supply is limited. There’s around 20% of total gold left to be mined. The supply of gold is limited — once the last ounce of the precious metal has been mined, that’s it. 

In the case of Bitcoin, while its supply is capped to 21 million Bitcoins by 2140, Bitcoin has to compete with other cryptocurrencies (Etherium, Dogecoin, XRP, etc.), and the supply of cryptocurrencies as a whole is, in effect, unlimited.

We don’t buy the argument that Bitcoin has won the crypto race. We are barely 10 years into it, so if other cryptocurrencies solve some of the issues Bitcoin has (like extraordinarily high energy costs to maintain and create, the high cost of transactions, the regulation aspect, and whether or not it will be approved by governments as a legitimate currency), the crypto that wins the race will be a rare commodity

Until then, because gold is actually a rare resource, gold wins.

Gold compared to “digital gold”

Bitcoin is often being referred to as “digital gold,” but Bitcoin cannot and should not be considered the same as or similar to gold. Bitcoin is Bitcoin and gold is gold. “Digital gold” is just a simple and compelling marketing catchphrase that’s been the most widely accepted use-case offered up by crypto advocates, but it has no basis in reality.

Bitcoin is a highly speculative asset with high risk and the potential for high rewards. I cannot take that away from Bitcoin. I don’t want to. Gold is a low-risk asset that historically offers high long-term rewards and high growth during inflation and debasement of the dollar. It’s a store of wealth, a role that Bitcoin cannot play at this time and may never be able to play.

Since volatility is damaging to a portfolio, if an investor chooses to add Bitcoin to their long-term portfolio, it may warrant an even higher allocation to gold than we usually recommend so that the precious metal can manage the additional volatility.

If you’re still unsure whether to choose gold or Bitcoin as a hedge against inflation, financial crises, and stock market corrections, David Rosenberg (Rosenberg Research, former Chief Economist and Strategist for Merrill Lynch Canada and Merrill Lynch in New York), puts it this way:

“My vote would be for gold because it has thousands of years of a historical record as a store of value, has one-fifth the volatility of bitcoin and doesn’t face the same competition risk. The day that Queen Elizabeth trades in the five pounds of gold in her crown for crypto is the day I’ll shift course.”

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Joseph Sherman

Joseph Sherman

CEO, Gold Alliance