- 13 Jan 2023
- Precious Metals
- Comments: 0
Investing in gold cryptocurrency? Chances are you may have heard a few conflicting opinions about which is better. The financial market has had several debates on gold and crypto, discussing the best investment options with guaranteed returns.
However, if recent events are to go by, you may find it difficult to make a definite choice. Most of the popular cryptocurrencies have witnessed a downward trend lowering the confidence of potential investors. On the other hand, gold maintained its value, providing a hedge against market fluctuations.
The COVID-19 recession is one of the reasons that renewed people's interest in diversifying their investment portfolios and minimizing losses. Naturally, one of the best ways to hedge your investment is through alternative investments such as precious metals and cryptocurrency.
Despite its proven record, precious metals face one of the greatest competition in the modern era, cryptocurrency. Currencies such as Bitcoin and ETH bring a new perspective to investing and have been around long enough in the financial sphere to convince potential investors to try them.
Below, we will cover some of the aspects of gold and cryptocurrencies and compare them against each other to gauge to help you make an informed decision.
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Investing In Gold vs Cryptocurrency
Gold is one of the oldest forms of investment used in ancient times to date to store wealth. It has retained its status and strength in the financial market due to its ability to retain its value during market corrections. During inflation/deflation, the price of gold tends to hold steady, with its value rising against the downward trend of stocks in a recession.
Its ability to maintain its value during market fluctuation makes it ideal for hedging and diversifying your portfolio. During the recent recession, when cryptocurrency was at its peak, not all investors invested in it; some opted for traditional alternatives such as gold and silver. This move caused the price of gold to rise by more than 50%.
Despite the stability currently enjoyed across multiple economies, the price of gold has maintained a steady price range which is relatively higher than pre-pandemic rates.
Bitcoin is one of the most popular cryptocurrencies on the market and is currently used as a form of payment in some businesses. The decentralized technology was launched in 2009 and has since brought a new horizon to the financial market.
Like other digital currencies, Bitcoin started as a fraction of a cent which was later valued at $0.09 in 2010 for one Bitcoin. As it grew, it attracted several investors, which saw the setup of several large-scale Bitcoin mining farms and led to the emergence of cryptocurrency exchanges.
During the pandemic, critics and amateur economists saw various cryptocurrencies, Bitcoin included, hold steady against the recession. This trend convinced investors to increase the funds invested in crypto, with institutional investors looking at ways to develop investment instruments and generate returns, causing the price of one Bitcoin to skyrocket above $60,000 in April 2021.
However, the price of Bitcoin and other popular digital currencies has dropped, with industry players looking for ways to stabilize the market.
Similarities Between Gold and Crypto
Both gold and cryptocurrencies are considered alternative investments and are often used to diversify one's investment portfolio. Despite their glaring difference, these assets share a few similarities you can compare when making a decision on the best form of investment.
Gold has often been the go-to option for investors due to its rarity and finite nature. This principle applies to most currencies that draw their value from their limited supply. Having too much supply of precious metals would significantly affect its market value.
It's this finite supply of digital currencies that makes it valuable for investors. Despite the absence of a central regulatory body, too much cryptocurrencies can't be liquidated or bought at once since this would cause a rapid increase or decrease in value, affecting their stability.
Their limited supply makes them immune to some market influences, making them ideal for investors diversifying their portfolios to minimize losses.
Despite their ability to maintain stability during inflation/deflation, gold and crypto are bound to fluctuate in price over time. Investors looking to enter the market often research the current price while reviewing market trends to determine the asset's potential.
Technology has made it easy for you to track the performance of your assets in real-time and check the prices at your convenience. Keep in mind that the price of both assets fluctuates due to different reasons due to their varied volatility.
For example, gold is likely to rise in value if there is a looming shortage, while crypto will increase in value when an influencer recommends its use. Most economists and critics find it difficult to make accurate predictions about price fluctuations for gold and digital currencies.
Privacy and Independence
Some investors prefer anonymity when investing, especially when they have to move a lot of funds. God is heavily regulated, limiting the number of people who can access information on the amount of gold you sell or buy. The same applies to cryptocurrencies which run on an encrypted and decentralized system that makes it difficult for a third party to access the details of your transactions.
These assets offer a degree of independence, where you can sell your gold to your neighbor without informing anyone at your convenience. You can as well send crypto to your friends and family from the privacy of your home.
Technology has revolutionized how we view investment. For example, if you have access to a computer and an internet connection, you can easily invest in gold and crypto. There are several online companies that make it easy for investors to access these assets, especially when buying gold.
The best ort s that the gold is safely delivered to your preferred address in discreet tamper-proof packaging. For crypto, the digital currencies are transferred to your digital wallet. You can also leverage technology to track how your assets are performing.
Unlike in the past when you need technical know-how to invest in gold and crypto, today all you need is a laptop where you can read about them or access an agent who will walk you through the process and make some of the investments on your behalf.
Gold has a long-standing reputation in the financial market as a unit of trade and a measure of wealth. On the other hand, crypto has quickly risen to become an accepted form of payment across many businesses. However, keep in mind that most traders accept cash over crypto and gold.
Key Difference Between Gold and Cryptocurrency
As mentioned, gold has been on the market for thousands of years as a means to store wealth and exchange. On the other hand, cryptocurrencies are relatively new, with over a decade of existence. However, cryptocurrencies have achieved widespread recognition as an alternative investment.
Gold has one of the most established systems focused on weighing, trading, and tracking. There are various regulations that guard against stealing or faking, making it one of the safest investments. It's worth noting that in most countries, you can't enter or leave with gold without declaring your possession and obtaining regulatory permission.
When buying gold, you can only get it from registered dealers and brokers; something we can see with several gold investment companies. However, it's best to buy physical precious metals if you have secure and safe storage.
Bitcoin, on the other hand, is difficult to fake or steal since it is located on an encrypted and decentralized system. Over the years, it has become accepted as a form of currency in several countries, with the exception of a few.
The main demerit of a cryptocurrency is the lack of a central regulatory system. This makes investors vulnerable to attacks and difficult to monitor. Its decentralized and anonymous state also makes it difficult to formulate laws to govern its sale, acquisition, and ownership.
Liquidity is one of the main concerns for most investors, especially those looking to hold an asset for a short period. Cryptocurrencies are considered to be very liquid compared to most assets; however, this may not always be the case. This means there are times you can easily dispose of your assets, and there are times you won't.
If you are looking for an investment, you can opt in and out quickly, then gold and other precious metals may be your best option. Regardless of the quantity, Gold can easily be reallocated within your portfolio to hedge against market fluctuations.
Keep in mind that if you have several hundred Bitcoins or ETHs, you may find it difficult to dispose of all of it within a short time, especially if you need the funds urgently. This is because most platforms on which you can trade have specific limits to how much you can trade in a day. For example, on Coinbase, you can only liquidate $50,000 worth of cryptocurrency per day. This means you can't liquidate cryptocurrencies worth above your daily limit, forcing you to sell them in bits.
Unlike gold which doesn't lose its value when there is a surge in sellers, digital currencies tend to lose their value when a large number of investors begin selling their currencies.
Previously we touched on the uses of gold, including as a unit of exchange and to store wealth. Aside from its role in the financial market, it's also used in luxury items, electronics, and specialized dentistry. Due to its numerous applications, gold has been able to maintain its value for centuries, giving you a foundation when your other assets fall.
On the other hand, digital currencies have limited applications (specifically in the financial markets). Cryptocurrencies work as virtual money and can be held as speculative investments. However, the technology behind digital currencies is being adopted in the financial industry.
Financial institutions are looking to utilize the decentralized system to facilitate online transactions and increase the safety of money transfers. Digital currencies have curved their niche in the financial markets as they can be used for lending and borrowing.
Volatility refers to how an asset reacts to market fluctuations and other external factors. As we all know, Bitcoin is used as a speculative investment, hence is subject to investor sentiment, media effect, market hype, and regulatory actions.
Positive and negative news from key players in the digital currency market is likely to cause panic among investors, causing them to make rush decisions that may affect the value of digital currencies. In the past, misinformation caused the prices to fall, while the entry of new players caused the prices to skyrocket.
On the other hand, gold has relatively low volatility and is hardly affected by external factors and market fluctuations. However, you should note that the price of gold will likely go up when there is an increase in demand before it stabilizes.
To match the stability offered by gold, investors in digital currencies have created several other currencies, dubbed 'stablecoins.' These currencies offer more stability since their values are attached to another stable asset or fiat currency.
Production and Ownership
Gold production shows a clear difference between both assets as one is mined while the other is generated through computing power. Gold is mined all over the world, with no continent producing more than 30% of the world's total gold.
When it comes to ownership, gold can be held in various forms by the national treasury, holding less than 5% of physical gold above ground. More than 50% of gold is held by people in the form of jewelry, while 20% is held as gold bars and coins by investors.
The diversity in ownership and production of digital currencies is limited, with five countries controlling approximately 80% of the computing power used to generate cryptocurrencies. It's worth noting that its ownership is also concentrated, with an estimated 2% of cryptocurrency holders owning more than 95% of all the available bitcoins.
In comparison, gold can easily be accessed from any part of the world with few restrictions on ownership. On the other hand, Bitcoin ownership is less widespread, with some countries imposing several restrictions on its production and use.
Does Bitcoin or Gold Protect Against Inflation?
Gold and crypto are classified as alternative investments and are often used as hedges against inflations. However, economists view this from multiple points, including ease of access, other sources of demand, history, and effectiveness. Determining its ability to hedge against inflation will help settle the argument as to which is the best option of the two.
Bitcoins have been around for slightly over a decade, experiencing its up and lows, with the last year being one of the roughest points. These instabilities and lack of longevity have raised concerns over its ability to effectively hedge against inflation.
On the other hand, gold has demonstrated its ability to maintain stability during inflation, protecting your investments from total collapse. Despite the lack of a historical record of the performance of crypto during a high inflation period, digital currencies are expected to offer an alternative to fiat currency.
Governments across the world have been printing more money in the last decade, causing an increase in inflation. The increased supply can only be mitigated by the supply of an alternative currency that is limited in supply (cryptocurrencies).
However, due to its decentralized nature, it isn't easy to develop an effective to determine the true value of crypto.
When comparing gold against crypto on its ability to hedge against inflation, you will find a lot of supporting material to back gold. On the other hand, crypto is relatively new in the finance market, with slightly more than a decade to its name.
According to economists, gold has had thousands of years to establish itself as a store of value with a historical record of its performance against major inflations. This cannot be said about bitcoin and other digital currencies, which are still defining their characteristics as a hedge in the modern economy.
With limited information on its viability, experts are stating that holding crypto is a hedge against inflation. This was further fueled by the emergence of multiple digital currencies and the entry of the central bank into the market. Authorities across the globe have also been making moves toward regulating cryptocurrency, which is set to have an effect on its performance.
Ease of Access
With the right tools and resources, anyone can buy and sell gold and cryptocurrencies. There is always an investor who is ready to buy your assets at the market. However, gold outshines crypto since it has a more established system with grounded regulations to protect you as a buyer or seller.
Gold has multiple investment avenues, including physical gold, stocks in companies mining gold, ETFs that own physical gold, and trading futures. With these options, investors can fund their portfolios based on their goals, making them easy and affordable.
Investors looking to buy crypto can do so through traditional brokers and crypto exchanges, that is, if they don't mind the broker holding on to their assets. However, if you want to own your digital currencies privately, then you have to buy through an exchange that allows it.
You should note that accessing Bitcoin is relatively complex compared to gold. However, promoters have been working on ways to ease access to digital currencies, for example, through ETFs.
When comparing costs, cryptocurrencies can be cheaper at times, with traders paying one-off commissions to buy digital currencies. On the other hand, if you buy gold ETFs, you pay no commission but are likely to have an ongoing expense to service and maintain your assets.
Holding your gold asset for a long time will likely cause your charges to rise, increasing the cost of ownership over time. The same applies to cryptocurrencies; trading frequently means you have to pay more commissions making it a bit more expensive.
Other Sources of Demand
When looking at gold and crypto as a hedge against inflation, you need to look at their other sources of demand. As mentioned before, gold has several uses across multiple industries, including jewelry, medical applications, industrial, electronic, and as a store of value. Bitcoin, on the other hand, is used as an alternative form of payment.
Understanding other sources of demand for the assets besides investment is important since a multifaceted demand has a direct impact on the value of your asset and is also the main principle behind its ability to serve as a hedge against inflation.
According to experts, cryptocurrencies are classified as speculative assets with limited liability. Its applications are still limited, increasing uncertainties around using it as a medium of convenience. Recent events have greatly affected the value of digital currencies, making forcing even promoters to proceed cautiously.
The decision to choose which is better between crypto and gold ultimately lies with you, the investor. However, gold brings a strong case against digital currencies pegged on historical performance and established systems.
It's worth noting that gold has been around for hundreds of years and has a wide range of applications increasing the confidence of potential investors. The young age of Bitcoin and other currencies doesn't do them justice, and we are yet to see how they perform against major inflation.
Take time to review your investment goals, as well as your own goals, to determine which asset best fits your needs.
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