Gold and Bitcoin Old World Money and Digital Currency
The mainstay currency and store of value for most of human history, gold, has been used for millennia. Though still a scarce metal, it is used in jewelry, investments, and electronics products. Gold has a scarce but unknown supply. It is estimated that 197,500 tons of gold have been mined, with an estimated 50,000 tons yet to be mined. As gold is almost indestructible, its supply will persist over time.
Based on blockchain technology and founded by the mysterious Satoshi Nakamoto, Bitcoin is a decentralized digital currency backed by years of computing work. With its limited processing capacity of ~5 transactions per second, high transaction fees, and scarce supply of 21 million coins, Bitcoin has been dubbed “digital gold.” It has recently been recognized as a store of value due to its recent record of returns.
Let’s dive deeper into each asset and how they function as investments.
There are three ways to buy gold:
- Own physical gold
- Invest in gold miners
- Invest in a gold ETF (Exchange-Traded Fund)
There are additional costs associated with owning large amounts of physical gold, including the risk someone may steal it. In addition, miner stocks are volatile and will require you to conduct research to stay informed on them as you maintain your positions.
Investing in a gold ETF like IAU or GLD is the simplest way to hold gold. Each ETF’s trust owns a certain amount of gold bullion (think gold bars). Thus, each share of a fund represents a portion of ownership in that fund’s gold reserve.
From 1971 to 2019, gold has returned an average annual rate of 10.61%, putting it behind stocks and commodities, according to Statista. Investopedia reports that equities and bonds have historically outperformed gold in the long term, indicating the relatively higher success of other established asset classes. Over the last 10 years, gold has crashed from its high of $2,168 and is still recovering at a price point of ~$1,780.
Based on the data, gold’s performance would not have been a suitable vehicle for wealth preservation in the prior 10 years. It has lost value in a period characterized by a booming, record-breaking stock market.
Gold has had its moments as a hedge against volatility outperforming other assets for short periods of time. If you are an investor expecting high volatility or approaching retirement, holding gold as a temporary store of value may be helpful to weather the storm. In fact, gold moves in opposite the direction of the stock market, which explains its performance trend mentioned above. As stocks drop, gold tends to rise making it a useful counterweight.
As a store of value, it’s also a hedge against inflation. Inflation eats away at a currency’s value over time. Gold preserves value against inflation as its prices move opposite to the dollar as the dollar decreases over time, gold goes up in value. If gold’s price doesn’t move too much (much like the last 10 years), it is still a solid way to preserve value against dollar inflation. Given the Fed’s recent printing of USD, inflation has risen to unusual levels making many investors worry for their savings.
The rule of thumb with gold investing is to limit it to 5 to 10 percent of your overall portfolio depending on your risk tolerance of course. As an asset, investing in gold will not yield the average annual returns that other asset classes regularly do. If an investor is looking for stability, lower risk, and consistent returns then dividend stock investing can offer that.
Founded by the mysterious Satoshi Nakamoto, Bitcoin is the world’s first decentralized digital currency and has a market cap of over 1 trillion at the time of writing this article. There will only be 21 million coins in existence making it a scarce asset. Its premise is to challenge the existing financial paradigm based on the US dollar and the power of leading banks.
According to CoinTelegraph, Bitcoin’s performance beat out other asset classes by 1,000%. It has achieved average annual returns of 230% since its inception. For context, the Nasdaq 100 had an average annualized return of 20%, only a tenth of Bitcoin’s performance over the same period. That’s not to say this astronomical return is not without its risks. Earlier this year, Bitcoin hit an all-time high of $65,000 and fell to $28,000. As the chart below illustrates, Bitcoin goes to the Moon and falls back to Earth in regular cycles.
That said, Bitcoin has risen over 20,000,000% since 2011 and is believed to have more room to grow as institutions are investing in it and other cryptocurrency projects. The Bitcoin price trends move with its halving cycle, an event where the mining reward halves cutting Bitcoin production by half. Each halving event reminds investors Bitcoin is becoming more scarce, incentivizing them to buy what they can.
Initially viewed as a new form of money, the market is increasingly accepting of bitcoin as a store of value to help investors preserve their wealth in the face of higher-than-anticipated inflation in the US. Institutional investors worldwide have taken an interest in bitcoin and have been investing over the last year. Backed by its proof-of-work mining algorithm and record of cryptographic hashing, Bitcoin has earned its place as the first of a young, alternative, and high-growth asset class.
Fundamentally, Bitcoin and other cryptocurrencies have value because the investing public has come to believe they do – like any other asset class.
Getting into Gold and Bitcoin
If you want to add gold to your portfolio, you can buy shares of gold ETFs on brokerages like E*Trade, TD*Ameritrade, or many others. Most gold ETFs do not offer the right to redeem fund shares for physical gold. You can buy and sell them as easily as any stock. You can also buy gold miner stocks or buy physical gold through websites like PMEX, JM Bullion, and WholesaleCoinDirect.
If you want to get into bitcoin or other cryptocurrencies, create an account and trade on cryptocurrency exchanges like Coinbase, Coinbase Pro, Kraken, Bittrex, or many others. The crypto space has many scammers, so select a mainstream exchange for the safety and security of your assets.
The Bottom Line Bitcoin vs Gold
While gold is a store of value, it has not matched bitcoin’s recent performance record. Like gold is, bitcoin is an investment used to hedge against inflation and could continue its meteoric rise in the future. As the world becomes more skeptical of institutions, the rise of decentralized, digital money offers a different option than inflationary fiat currencies. Bitcoin is still volatile, and its future performance is hard to predict since it was created only 12 years ago.
As a precious metal, gold has not retained its value well over long periods of time though it is still considered a store of value by some investors. Investing in a tangible asset with real utility appeals to lower-risk investors. No matter which one you pick, a well-balanced portfolio is the key to financial freedom.