During periods of inflation and economic uncertainty, investors always look for safe and profitable assets to hedge against potential losses. Gold has historically been such a safe-haven asset, but now many investors are choosing bitcoin to fulfill the same need.
Gold has been used as currency and a store of value for thousands of years, so how can a relatively new digital currency offer risk-averse investors similar benefits? Read on for a breakdown of gold vs. bitcoin, which includes tips to help you make informed investment decisions. We’ll also provide some insight into alternative investments that blend features of both assets.
As always, be aware of the risks associated with any investment, but particularly those associated with higher-risk investments like bitcoin.
Bitcoin vs. gold: a brief history
When it comes to gold and bitcoin, no two assets could be less alike. Gold is a physical asset that served as the basis of international currency for hundreds of years. Alternatively, bitcoin is a recently developed cryptocurrency whose value is based on the perceptions of those who buy and sell it.
The two are uncorrelated assets, meaning the price of one has no impact on the other. Gold, for example, is correlated to the U.S. dollar: When the price of the dollar increases, the price of the gold usually decreases, and vice versa. But with gold and bitcoin, there’s no correlation.
Gold
Gold is a tangible asset with inherent value, unlike stocks, bonds or fiat currency. Investors turn to gold because its value isn’t tied to the performance of any industry, sector or company, making it an excellent store of value and a safe-haven asset.
One of the primary reasons to invest in gold is precisely that resilience to market forces. Gold is a hedge against inflation, meaning it retains or grows in value even when the value of fiat currency declines.
However, investing in gold is not without its disadvantages. Buying physical gold requires secure storage and insurance, and there are significant tax consequences to be aware of.
Bitcoin
Anyone unfamiliar with bitcoin — or crypto markets in general — should research its risks and if it’s a match for their risk tolerance. Even if you find yourself asking whether your crypto is safe (or what HODL means), there’s no question that bitcoin has changed the world since its inception.
While gold has been used by humans for thousands of years, bitcoin has only existed since 2009. It’s a digital currency created by an anonymous developer under the pseudonym Satoshi Nakamoto.
It’s also a decentralized currency, meaning it isn’t controlled by any government or financial institution. Instead, it relies on software known as the blockchain. The blockchain is essentially a complex algorithm with built-in transaction verification and documentation. The blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together.
One of the primary advantages of investing in bitcoin is its highly liquid nature. Transactions occur within minutes, if not seconds, allowing investors to buy or sell the crypto quickly. What’s more, there’s no need to go through an exchange, brokerage firm or other financial institution, though some of those centralized platforms do offer it.
While bitcoin is subject to taxation and regulation, it was designed to operate independently from outside entities like central banks or governments that might try to control or influence the digital currency like they do with fiat currency. This makes it a more flexible and agile asset, as investors can buy and sell as often as they wish.
Bitcoin’s real-world value is increasing, as well, reinforcing its place as the most appealing crypto available today. For example, bitcoin debit cards have partnered with major payment-processing companies like Mastercard and Visa to allow you to spend the digital currency for goods and services. More businesses are beginning to accept bitcoin as payment, including Airbnb, Autozone, Best Buy, Microsoft, Overstock, Shopify and Tesla, among hundreds of others.
However, no investment is without risk. While bitcoin may be attractive because of its liquidity and ease of transfer, these qualities also contribute to one of the chief downsides of the asset: high volatility. The value of bitcoin can fluctuate rapidly, making it a higher-risk investment.
A comparison of bitcoin and gold
The juxtaposition of one of the world’s oldest assets and one of the newest makes for an interesting analysis. The nature of each asset makes them attractive to investors for different reasons. The following are a few ways the two…
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