Bitcoin vs. Gold as a safe haven investment
For decades, gold has served as a popular alternative investment during times of economic downturn or uncertainty, most notably because its price performance is not closely correlated to that of traditional stocks. This sentiment has grown throughout the past year, as the COVID-19 pandemic has caused investors to gravitate toward asset classes that are more stable and less volatile.
The past year has also seen investors gravitating toward a newer safe haven vehicle: cryptocurrency. In particular, bitcoin has emerged as a popular hedge against present-day risk. While both are seen as good ways to diversify, which is ultimately the more effective hedge?
Here is a closer look at how bitcoin and gold compare to one another as safe haven investments during times of market uncertainty.
Gold: The centuries-old store of value
Gold has been a go-to hedge for decades, and it has been a cherished and highly sought-after material for much longer than that. This is largely due to its contrast with traditional stocks.
When you buy a stock, you own a portion of the issuing company and profit when that company profits and the stock rises.
When you buy gold, you own a physical commodity and profit when the demand for that commodity increases and causes its price to do the same.
This provides protection against market corrections and allows gold to remain static during times of decline – which is valuable in an alternative asset.
There are several other reasons gold can serve as an effective hedge against risk. It is widely used and valued in consumer goods such as jewelry and electronics. It cannot be manufactured and is also scarce, which bodes well for its price regardless of demand. These properties also help separate gold from fiat currency and stocks, especially since the U.S. moved fully off the gold standard more than 50 years ago.
Bitcoin: The high-upside digital asset
As bitcoin’s price has increased exponentially over the past year, it has caused many to question if they should shift their attention from gold to the newer, higher-upside alternative.
It could be expected for bitcoin’s notorious volatility to discourage investors from turning to it for stability, but it does have numerous properties that could make it a viable alternative to gold. The two assets are similar in many ways, causing some to even refer to bitcoin as “digital gold.”
Like gold, bitcoin has minimal correlation to stock market activity. There is also a limited supply capped at 21 million, which is not expected to be reached until around 2140. Bitcoin is not issued by any central bank or government, and can only be created through mining.
Periodic halvings prevent market flooding and help make bitcoin a deflationary asset, meaning that over time, its buying power is designed to increase rather than decrease as with the inflation of fiat currency.
While gold had widespread consumer value, bitcoin also has use in its ability to be sent across borders inexpensively. It also has potential as a means of banking for those without access to traditional banks.
Volatility is of course the main concern for investors, especially considering the overarching purpose of a hedge investment. Bitcoin’s price is heavily subject to market speculation and emotion. Stablecoins, however, can serve as a more reliable option. Tether, for example, is linked to the U.S. dollar which helps reduce volatility in contrast to the value of fiat currency.
So which is better?
Whether gold or bitcoin is better may depend on your portfolio’s risk tolerance. Gold is scarce and stable and has a long track record of serving as a reliable store of value.
Bitcoin is limited in supply and deflationary in nature, having spent much of the last year experiencing a meteoric rise in price.
While gold seems to represent a safer option to bitcoin’s higher upside, buying both can potentially deliver the best of both worlds and make use of diversification as its own form of hedging.
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