Gold and Bitcoin are two assets that provide individuals with a way to “exit the system” as they remain uncontrolled by banks or government institutions. However, despite their similar use, the two assets differ dramatically. Many investors have become interested in Bitcoin this year due to its exponential growth and rising popularity. Certain commentators are even suggesting Bitcoin is a new alternative to gold as a long-term store of value. This comparison does not seek to deny Bitcoin’s virtues: only to compare the two assets to find the most appropriate investment strategy and highlight some of the risks that must be considered. The road to ‘gold 2.0’ may not be as shiny and straight as many would have you believe.
Gold
Investors can safeguard gold in multiple ways giving them complete control and autonomy. Even in apocalyptic scenarios, or cyber-attacks gold will always be there as it’s tangible and can be used in the real world. This makes gold reliably valuable and a stabilising element in any portfolio. If it’s kept in a secure vault, it can also be insured.
Bitcoin
Although Bitcoin is one of the most secure digital currencies, no technology is fool proof, and the crypto world is riddled with fraudulent activity. Think recently of the bankruptcy of FTX, the third largest crypto platform in the world. It’s estimated that at the end of 2022, £210 billion in Bitcoin had vanished due to hacking incidents. To safeguard from loss or theft, investors should utilise a cold wallet that remains offline. However, if you lose your password, you lose your Bitcoin forever. Bitcoin also can’t be conventionally insured as it’s not a tangible asset.
Gold
It’s more than digits on a screen, it’s real and tangible. It can be held, stored and hidden away from the prying eyes of those wishing to take it from you, should your opinions differ from the mainstream narrative.
Bitcoin
Blockchain technology records the entire ownership history of Bitcoin. Consequently, authorities are capable of tracking Bitcoin back to you. This is the case regardless of whether coins are left on an exchange or stored in an anonymous wallet.
Gold
If you purchase the correct products, gold is considered legal tender and therefore completely devoid of capital gains tax. As it has a face value it can theoretically be used to pay debts (even though this would be highly impractical and expensive).
Bitcoin
Is subject to capital gains tax at 20% as it is not legally money. It is considered an asset just like property or shares. The chances governments will ever decree that an anonymous cryptocurrency be given legal tender status is virtually zero as they will never give up more power.
Gold
Gold is revered for its stability and low volatility. Some economists even argue that all prices should be measured against this benchmark of monetary value. While gold’s price can still experience a sharp upsurge due to market demand, it continues to be a dependable asset for long-term ownership. In the last ten years Gold has experienced volatility of about 14%, a figure that is nearly ten times less than Bitcoin’s.
Bitcoin
Bitcoin is synonymous with extreme fluctuations, embodying a high-risk, high-reward investment strategy. Historically it has proven to be subject to ‘the media effect’, excitement and investor sentiment. News can cause investors to lose their cool and act impulsively. The mere utterance by Elon Musk on Twitter of his Bitcoin sale caused the price to plummet 10% in hours.
Bitcoin’s Value-at-Risk (VaR), which measures how much an investment might lose under normal market conditions is eye-wateringly high. Throughout any given week in the past two years, there was a 5% chance that investors could lose £2,160 for every £20,000 they invested in Bitcoin – a risk nearly five times higher than that of gold. The World Gold Council therefore recommends a higher allocation to gold for those with a substantial exposure to Bitcoin to ensure a balanced and diversified portfolio.
Gold
Gold is gold – its immutable nature is its beauty. This simplicity offers unparalleled safety as it can never be changed.
Bitcoin
The most existential threat to Bitcoin is a code change which contains a critical vulnerability. This could ignite an unintended consequence, either due to malice or human error. Unintended consequences of changes to systems like Bitcoin are more likely than people think. Like anything man-made it’s fallible. There’s over a trillion dollars of wealth in Bitcoin but less than 20 people watching over the code. One line of wrong code could undermine trust forever. If malicious actors wanted to attack Bitcoin, they could try to pass a formal proposal to change the network (which is highly unlikely to succeed) or exploit the error of a coder, made in good faith (far more likely).
Gold
Gold is one of the most liquid assets available, meaning you can quickly and easily convert it to cash when you need it. The distinct advantage of this is that it’s still readily available during periods of market stress. Gold’s market cap is much bigger than Bitcoin’s, making it a more liquid asset (£11.5 trillion v £1.1 trillion). Investors have the ability to sell gold bars and coins in a day, even in extremely volatile markets.
Bitcoin
Bitcoin is also a very liquid asset that allows investors to buy and sell their investments within minutes. It’s not a regulated exchange and operates 24 hours, seven days a week, meaning transactions are not limited by market hours. However, there’s a catch. Whenever the price rallies dramatically, exchanges are unable to provide liquidity and consistently shut down. This has happened during every bull cycle in Bitcoin’s history and Coinbase has already closed down in 2024. ‘Circuit Breakers’ are frequently employed by exchanges, meaning people trade to take advantage of the price they desire. Whether this is incompetence or something more sinister is anyone’s guess. Even when the exchanges are running efficiently there are still issues and time constraints when trying to buy or sell large amounts (10-100+ BTC) quickly.
Gold
Gold isn’t a way to make a fast buck but rather aligns with the strategies of long-term investors. In prosperous years, its price has increased over 100% but, on average, has delivered 10% per year over the last decade. This has surpassed the performance of most other asset classes.
Bitcoin
Typically follows a four-year cycle known as the ‘halving cycle’ which alternates between periods of rapid growth and horrifying declines. It’s hard to ignore Bitcoin’s extreme growth when times are good as it can go up by many multiples in a year. Many people are still kicking themselves for not getting into the market at its inception as there is evidence that those returns are now diminishing.
Gold
With a 5,000-year track record of maintaining its purchasing power, gold’s natural characteristics mean it can’t be replaced by any other metal. It’s the only currency to have survived in its original form. Even other monetary metals like silver and platinum have distinct industrial and investment applications that differ greatly from gold.
Bitcoin
Bitcoin has been around long enough to prove that it works and does have a first mover advantage. However, investors must place their trust on the premise that it will continue to dominate the cryptocurrency sector. As technology continually advances, Bitcoin, despite its vast and dedicated following, could theoretically be replaced, and replicated. In the realm of technology, network effects can have an expiry date when a new and better technology emerges – just look at Google being challenged by ChatGPT.
Gold
Not only is gold a favourite among individual and institutional investors, it also holds a special place in the reserves of central banks globally. Its growing application in technology, high-end electronics, and popularity in jewellery – especially in societies like China and India due to its profound cultural and religious significance. Gold’s appeal as an investment asset as well as a consumer product distinctively positions it from other investments. This dual nature leads to a robust performance in both good times and bad.
Bitcoin
Bitcoin is more of a speculative investment than a long-term store of wealth. Blockchain analysts estimate that 6,952 Bitcoin wallets possess 58.21% of all Bitcoin’s in circulation. This implies that only 0.01% of all Bitcoin holders own over 60% of the entire number of Bitcoin’s. Assets with a smaller market size like Bitcoin are therefore very easily manipulated by rich investors who dramatically affect the price with their buying and selling.
A Symbiotic Relationship?
The large majority of our investors hold various cryptocurrencies including Bitcoin. The most common strategy we see is to diversify between both assets. When the crypto market undergoes a bull cycle and increases substantially, they will ‘profit take’ and protect their newfound wealth in physical gold until the next 4 year cycle appears. This will tend to increase as the crypto market inevitably plunges again.
Conclusion
Naturally, Bitcoin isn’t gold. Gold is widely accepted as the preferred safe haven. This can be partly attributed to its long history and established position in the world economy. Gold has been relied on as a safe haven against inflation by governments, central banks, and investors. They see it as a long-term way to preserve capital during times of economic uncertainty.
Key Takeaways
- Although there are some parallels between gold and Bitcoin, they are two very different assets with distinct purposes in your investing portfolio.
- Bitcoin carries a significant risk in addition to the possibility of large gains. Just decide how much capital you can handle losing beforehand.
- In order to counterbalance the volatility of Bitcoin, you should consider including some gold bullion.
How to get started
