Bitcoin vs Gold: Which is Better to Invest In? [Infographic]
This post was originally published on Jun 17, 2021, and last updated on Jul 29, 2022. The bitcoin vs gold debate has been going on since some crypto proponents likened bitcoin to “digital gold”. But are they actually that similar? This post lists the similarities and differences between cryptocurrencies and gold, their pros and cons, and why both have roles in your investment portfolio.
Gold as an Investment Choice
Gold has been a wise investment choice for decades - helping investors protect and grow their wealth. It’s no surprise. Gold is historically an effective hedge against economic turmoil, a security and safe harbour for many when traditional financial systems weaken or grow unstable. It has also been a foundation for the financial strength of national governments. Gold was one of the top resources every country wanted to secure, take, or protect, during World War II. It was often required to pay for materials, armaments, and weapons when national currencies became useless for exchange.
“The historical promise of gold to investors has always been twofold: one, that over the long term — and I stress this, over the long term — gold can improve your returns, and it can also help to reduce your volatility,” George Milling-Stanley, chief gold strategist at State Street’s SPDR ETFs.
By the end of 2021, the total above-ground amount of gold is estimated to be 205,238 tonnes. Based on the spot-price high of $2,776.56 (NZD) on 28th July 2022, this makes gold’s total market value over NZD 18 trillion.
Enter Cryptocurrencies
Cryptocurrency, the first of which was Bitcoin, has been raging forward in speculative value growth with outstanding results. Cryptocurrencies are entirely electronic, marrying themselves to the digital age 100 per cent and producing gains for holders in the 1,000s of percentage points. As a result, many have been drawn to speculate on digital assets, considering these as higher-returning investments above precious metals and stock markets. Looking at the total market capitalisation of all cryptocurrencies on 28th July 2022, crypto comprises over NZD 1.6 trillion. Despite the recent crash in value, this is still up from $1.2 trillion at the same time last year. This shows a massive movement of money worldwide moving into the digital arena. Looking at bitcoin alone, the market cap on 28th July 2022 sat at NZD 692 billion, down from $1.3 trillion this time last year. Figures like these highlight the extreme volatility cryptocurrencies experience.
Infographic: Gold vs Crypto
Similarities Between Crypto and Gold
Scarcity
Both crypto and gold exist in finite amounts, making them deflationary in terms of reducing supply. Bitcoin has a hard cap of 21 million BTC being created. The last bitcoin to be created will occur in 2142. No one knows exactly how much gold is left to be mined, but estimates from the World Gold Council put it at around 54,000 tonnes. Due to the increasing difficulty of extracting this remaining gold, experts believe large-scale gold mining will cease by 2075 unless mining technology improves dramatically.
Ease of Access
Crypto and gold are relatively easy to obtain as they’re both divisible into small amounts. The only real limitations are having the money necessary to buy the minimum purchase amount and having access to a seller. With the exception of a few countries, you can buy, sell, and transfer cryptocurrencies worldwide. There have been legal restrictions on the ownership of gold in certain countries in the past, but these have since been lifted.
Affected by Geopolitical Events
Geopolitical turmoil is one of the primary drivers behind the price of gold and has been for decades. Gold prices are usually positively correlated with rising tension - factors such as high inflation, pandemics, sanctions, and wars tend to drive the price of precious metals higher. Because most cryptocurrencies are decentralised (not relying on a central party overseeing them), the demand for them is also seemingly affected by geopolitical events. The potential of certain tokens as an alternate financial system is attractive. However, it must be noted that this also hugely impacts their price volatility, as seen with the market crash of early-mid 2022.
Liquidity
The liquidity of both is very dependent on the market and the particular type of asset. Liquidity refers to how easily an asset can be turned into cash, i.e. bought or sold. Gold bullion is considered a highly liquid asset as its market is well-defined. Large numbers of buyers and sellers are constantly available. When it comes to collectables (numismatics), the market is smaller. Bitcoin and Ethereum are easily the most liquid cryptocurrencies, but some of the lesser-known tokens have very illiquid markets.
Value Exchange
Gold is a widely accepted, tangible asset, making it an ideal form of value exchange. Crypto makes cross-border transactions near instantaneous and incredibly cheap. The downside here is that crypto isn’t legal in certain countries.
Differences Between Crypto and Gold
Risk Tolerance / Market Volatility
Bitcoin and all other cryptocurrencies are extremely volatile and high-risk investments, subject to hype, investor sentiment, and many other external factors. Gold, while still volatile, is much less so than crypto. Most forms of gold investment are viewed as a low-medium risk. The graph below, from Longtermtrends, shows the per cent change in the price of bitcoin versus gold between July 2021 and July 2022. As you can see, the value of bitcoin fluctuates wildly compared to gold.
Speculation vs Investment
Crypto is more of a speculatory investment, with many purchasing and selling in the hope of making substantial, short-medium-term gains due to its volatility. Naturally, this means they’re also subject to massive potential losses. Gold isn’t seen as a speculative investment. Typically, one buys gold to hold for a long-term period, with the view that it will gradually increase in value, as has been seen historically.
Tangibility
Perhaps the single most significant difference between the two is tangibility. Cryptocurrencies exist solely as digital tokens, whereas gold is a tangible asset one can see and feel.
Regulation
Gold has well-established regulatory rules in most jurisdictions. Provided one uses a reputable dealer, it's considered a very safe asset to buy or sell. By contrast, crypto regulations are still very much in their infancy and being formed. Cryptocurrencies are still largely unregulated globally.
Store of Value / Inflation Hedge
Regarding value protection, gold clearly outperforms crypto in terms of price stability. The simple fact is that Bitcoin is not a good “store of value” because of the massive volatility in price movements. Inflation hedges provide stability in times of economic instability and volatility - the point is to offset the effects of or resist inflation. Gold has thousands of years of history as a store of value and an inflation hedge, unlike bitcoin (and all following cryptocurrencies), which Satoshi Nakamoto created in 2009. Bitcoin is only experiencing its first period of high inflation now. While bitcoin is pitched as “digital gold” and an inflation hedge, experts are far more confident in real gold’s ability.
Costs
Excluding the asset's price, there are certain additional costs associated with crypto and gold. With crypto, you pay fees when you purchase or sell it. You also incur transaction fees when sending from one wallet address to another without the amount dependent on the blockchain involved. A positive for crypto is that it’s virtually free to store. You only pay to store cryptocurrencies if you purchase a hardware wallet device. With gold, the fees vary depending on whether you buy physical gold or some other form. With physical gold, you pay fees when you purchase or sell it, and you also need to factor in ongoing storage and insurance costs. Even with gold in the form of something like a mutual fund or exchange-traded fund (ETF), you can expect to pay an ongoing expense ratio as a management fee. Typically, ongoing costs associated with gold will be much higher than those for cryptocurrencies.
Use Cases
Gold has more use cases than most realise—the most apparent include an investment vehicle, collectables, and jewellery. There is also a growing industrial demand for gold in electronics, medicine, dentistry, and more. As for crypto, its usage depends on the particular currency, but mainly, it’s used in fintech only.
Global Acceptance
Gold isn’t likely to be rejected. It has been banned from private holders once or twice (the U.S. did exactly that when it wanted to consolidate gold within government coffers in the 1970s), but that didn’t make gold useless. Cryptocurrency, on the other hand, continues to make governments and law enforcers nervous. While digital assets work in a decentralised fashion, they also represent a means by which money and transactions can happen confidentially and without easy tracking. Cryptocurrencies have a long way to go before they can be considered fully established and accepted globally.
Pros and Cons of Investing in Gold
Advantages
Gold has stability in its corner. As mentioned earlier, precious metal has one of the widest acceptance capacities internationally and is recognised by governments, banks, companies, and individuals globally. Many economies continued to be based on gold, and some have argued even modern economies might fare better if they went back to a gold standard. Gold also has value longevity in its corner. For something that has been considered desirable and precious for a number of centuries, gold’s resume is fairly robust compared to most other asset types. Only land has been more influential in terms of physical holding. And, unlike land, gold is portable, which makes it even more powerful as the asset can be moved and exchanged easily in physical form. Gold is not something that can be easily lost electronically when it is kept secure. Yes, it's possible to have gold stolen physically, but if the bullion or item is kept in a safe when not in use, that becomes much harder to achieve. Cryptocurrencies can’t say the same thing. While digital currencies rely on blockchain technology and constant reinforcement by thousands of digital approvers of code, which catches mistakes and corrections very fast, it is still possible to steal large sums of digital currency. The most famous of losses was the Mt.Gox exchange, which saw millions of crypto holdings disappear in a hack of the exchange (a $250 million loss at the time). While the currency code itself was unaffected, the thieves added code that simply transferred everyone’s coins from their electronic exchange account to the thief’s account, making digital exchanges the Achilles’ heel of many cryptocurrencies, even today. Many exchanges have been similarly hacked, and similar losses experienced on newer, less experienced digital currency types.
Disadvantages
Many years back, gold worked as both an asset holding and tradeable currency, but those days are gone. Today, gold is primarily an asset used to protect against instability and inflation. That doesn’t stop its buying power, however. Gold usually needs to be exchanged for fiat currency prior to using its value for buying goods or services. Very few vendors will take gold outright in its metal form. The storage of gold and silver needs to be considered. Gold is very compact for its value-to-weight ratio and doesn’t require much storage space. Silver can be more challenging to transport and store depending on the total weight/volume you need to protect. MyGold can help with gold storage options, including gold safes and safety deposit boxes. The best option depends on your unique situation, how much you wish to store, the value of the items, your security arrangements, and your risk profile.
Pros and Cons of Investing in Bitcoin (or Digital Currencies)
Advantages
Investing in digital currencies like Bitcoin has its advantages and weaknesses as well. On the plus side of things, once one has an account set up with digital currency exchange, buying, holding, and selling cryptocurrency is very easy. In fact, it’s easier than trading in regular public market stocks. Cryptocurrency markets are operating 24/7. Any hour of the day or night, week or weekends, one can move, buy, sell and speculate in currencies. The action moves worldwide, and as long as there is sufficient account authority, one can move sizable value amounts in a matter of minutes through Bitcoin and similar. Bitcoin and cryptocurrencies may be able to be used for payments, assuming vendors are willing to accept them and set up to do so. Given Bitcoin’s stellar rise in 2020 and 2021, many vendors have begun accepting cryptocurrencies and will do so with more coins than just Bitcoin alone. However, it’s generally not possible to go and buy groceries yet with a crypto transaction. Instead, what is possible is to take out a debit or credit card based on one’s crypto account balance and use that for payment. The credit card company acts as the crypto payment process for any business connected to that network (VISA, for example). The four major cryptocurrencies can also be used for value investing and soon for payments on digital payment platforms like Paypal and Venmo, enhancing the liquidity of holdings online. Interestingly, every year in May, the day when Bitcoin was first used to pay for a pizza is celebrated, and that payment today was estimated to be well over $300 million prior to the recent 2021 Bitcoin crash that just occurred.
Disadvantages
As has been vividly seen in the charts above, cryptocurrencies are shockingly volatile. Gold has not had the rollercoaster swings that Bitcoin holders have experienced. These large price fluctuations have the capability to wreck entire lives and institutions, depending on how much one buys and when during the rise and value of a crypto currency’s activity. And the volatility doesn’t stop; again, the markets are live and active all the time. So, there is no guarantee that a value run-up in one year won’t crater out in the next or double in value five months later. The only consistent factors have been supply and demand for the given crypto coin. Bitcoin is easy to steal from people who aren't cautious. Once the currency is actually committed and sent via digital transaction, there is no way to reverse it. The only real recovery possible is for law enforcement to find the individual and get them to send the value back to the victim, which is usually unsuccessful. One character in Germany stole millions from victims. He has been since arrested, jailed, and ordered to return the cryptocurrencies, but he’s refused to give up the password. The decentralised nature of Bitcoin is so secure that it’s almost impossible for German law enforcement to break the password without spending millions themselves on the help to do so. Most law enforcement agencies won’t bother with such a costly effort. Bitcoin can quite easily lose worth, value, and even importance in the future. The cryptocurrency has only been in operation for most investors since 2008. Its significant value first arose in 2017. Given the nature of its assumed value, when the next big asset comes along, bitcoin could end up being seen as worthless in the near future. Conversely, gold is unlikely to suffer the same fate. It has a longer pedigree over centuries and survived turmoil and wars while still remaining extremely valuable. In fact, during a conflict, gold tends to be wanted even more. Exchanging bitcoin for fiat currency can be quite hard, with banks stopping many transactions related to crypto and some banks closing the accounts of anyone dealing in digital currency. And, of course, government rules and intervention make crypto very susceptible to being limited and restricted. We saw this in recent years with Inland Revenue forcing crypto exchanges to hand over all customer details and records.
Other Factors to Consider
Considering how exchanges occur with gold when handled by licensed, established dealers, there is quite a bit of protection for consumers. First, those dealerships are regulated by local governments in cities and regions within countries. They don’t wish to sacrifice their entire operation for one or two silly transactions. Instead, these businesses maintain a high standard to continue to receive regular customer activity and interest from buyers and sellers. The more stability, reputation, and goodwill these dealerships have, the better they operate. Crypto exchanges, on the other hand, have little or no control of bitcoin prices or other coins. Most of them operate as private tech businesses with a general business license, and that’s it. There is no protection of customer holdings if the exchange gets hacked, the business might or might not help customers, and very few laws specifically enforce the financial activities of exchanges. Much of this is starting to change with an increased regulatory overview, and bigger exchanges are willing to comply to have approval by government agencies like the U.S. Securities Exchange Commission (see Coinbase as an example), but by far, most exchanges still operate independently and with little scrutiny. Binance, for example, is a major crypto exchange and likes to market that it has no headquarters or physical central office in one particular geographic location. The application value of gold and Bitcoin are both tremendous as well because of their relative worth. Both assets can be used to pay for high-value transactions. Gold is limited by its physical nature, but borrowing and margin transactions can easily be built on the value when held by an institution. Bitcoin can be easily transferred in large amounts as well as borrowed against with margin as well. That makes both assets quite usable for supporting and funding large-cost transactions.
Can Bitcoin Replace Gold?
Not likely. Both serve different purposes in an investment portfolio and should be seen as complements rather than contenders.
Is Gold Safer Than Bitcoin?
Gold is a much more stable investment than bitcoin. Bitcoin’s Value-at-Risk (VaR) is substantially higher than gold’s. Over the past two years, investors risk of losing money was almost five times more than with gold. The World Gold Council advises that having a high allocation of one’s investment portfolio in cryptocurrencies warrants the need for a higher allocation to gold to provide balance.
Bitcoin vs Gold: Which is a Better Investment Choice?
There’s a lot of hype and speculative money involved in digital currencies–one tweet from Elon Musk and the price of multiple cryptocurrencies swing wildly. Of course, this speculative nature makes crypto attractive to those with a high-risk appetite. Most consider all forms of investment gold - bullion, collectables, ETFs (Exchange-traded funds), mutual funds - low-medium risk investments. This investment risk becomes high when it comes to gold futures, buying calls, or a brand new mining company’s stocks. Perhaps rather than asking which of the two is the best investment, it’s better to consider how each has a different role in your portfolio. You can use digital assets to satisfy your desire for speculation and the potential for astronomical gains. Whereas gold, particularly physical gold, helps to balance out that risk and provides more of a lower-risk investment.
“Which is better depends upon your risk tolerance, investing strategy, how much capital you have to use, and how much you can tolerate losing. Bitcoin is much more volatile than gold, making it a riskier investment than gold.” Investopedia.
If you’re ready to invest in precious metals, MyGold can help. As an established gold dealer in New Zealand, our inventory and product lines provide customers access to the best choices in gold bullion, both for investing and collecting. We also help customers with storage solutions and buy gold too. MyGold provides customers with industry-leading security, reliability, and customer service.
Disclaimer
The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of MyGold.