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As high inflation rates continue to trouble economists, some warn against an imminent recession, sending many people looking to commodity investments to protect their portfolios from significant losses.
Investors have been purchasing gold to hedge against inflation for decades, but the rise of cryptocurrencies has many wondering about the potential hedging power of Bitcoin and other cryptocurrencies.
This article discusses the differences and advantages of gold vs. bitcoin for today’s investors as the two representative options for commodity and digital currency investments.
Brief History of Bitcoin
The market turbulence during the 2008 Great Recession sparked an idea in Satoshi Nakamoto, who released a whitepaper about Bitcoin, a currency decentralized from financial institutions and intermediaries. The value of one Bitcoin was extremely cheap when it launched in 2009, but large-scale mining operations and increased popularity caused a massive price jump up to a record of $67,567 in November 2021.
Since the launch of Bitcoin, tens of thousands of altcoins have joined the cryptocurrency game, some performing better than others. These virtual currencies are still extremely new to the financial market, and their viability as stable investments is untested in the long term.
Differences Between Gold and Bitcoin
People have used gold and other precious metals for a multitude of purposes for millennia. The highly coveted yellow metal has a long and proven history in financial transactions and investments.
Bitcoin became the first digital currency in 2009, spurring the rise of cryptocurrency exchanges. People around the world began mining and trading Bitcoin and other virtual currencies, even first-time investors who previously struggled to access the expensive and complex investor market.
Gold and Bitcoin share many characteristics, such as divisibility, limited supply, and counterfeit resistance, but investors should consider how they differ when choosing their preferred inflation hedge.
The limitations of Bitcoin represent one of the significant differences between this cryptocurrency and gold. People have used gold for millennia, with its utility ranging from currency and trading to dentistry and jewelry making. Gold has a proven intrinsic value that has remained relatively steady over hundreds of years. As a tangible commodity, gold’s utility remains highly varied across industries.
Despite its utility limitations, Bitcoin remains the only digital asset currently used for speculative investment. Digital currencies have the potential to gain new uses as financing technology continues to advance, such as by providing a vehicle for decentralized finance. However, the cryptocurrency medium of exchange has only been around for less than two decades, and its long-term stability is yet to be seen.
Gold provides a more stable asset compared to Bitcoin. If you view a line graph of the price activity of these two assets over the 2010 decade, the Bitcoin price line jumps up and down drastically while the gold price line remains relatively stable with less drastic drops and rises.
Gold has provided steady purchasing power for 5,000 years through times of hyperinflation, stock market volatility, and other economic and geopolitical hardships. In the gold vs. Bitcoin debate, Bitcoin fails to offer the same stability as a very young asset driven by the high-risk, high-reward model.
Liquid assets can be sold quickly if the investor needs fast cash or wants to get out of the investment altogether. People trade gold worldwide, and new investors and collectors consistently look for buying opportunities. For this reason, many choose gold for its superior liquidity.
Many investors also consider Bitcoin a liquid asset, but daily limits set by exchanges and Bitcoin’s price volatility can complicate the selling process.
Adaption and Mainstream Acceptance
Bitcoin and gold can each serve as investment portfolio diversifiers, but many individual investors may still have reservations about Bitcoin’s ability to provide long-term stability. Gold has enjoyed global adoption and mainstream acceptance for a very long time, and people may put more trust in its reputation and earning potential.
Legal and Regulatory Status
Many investors may consider gold a safer asset due to the well-established regulatory system that weighs, tracks, and initiates the trading of gold. Purchasers buy gold from registered brokers and can feel confident in the authenticity and purity of their purchases.
Because it is an encrypted and decentralized system, Bitcoin also gives people confidence that the asset cannot be counterfeited. However, it lacks the regulations of gold, introducing more risks for investors.
Bitcoin vs. Gold: Investment Advantages
Bitcoin and gold both offer various advantages as alternative investments in addition to counterfeit resistance and finite supply.
- The advantages of investing in gold include the following:
- Proven stable value across long periods
- Established inflation hedge as its value tends to rise during market downturns
- High level of liquidity and consistent demand
- Well-established regulatory infrastructure
There are also several benefits of investing in Bitcoin:
- Accessible inflation hedge for people who can’t afford other investments
- Huge potential returns on investments
- Easy, immediate financial transactions completed online
- Supply and price value controlled by Bitcoin investors, miners, and users
Both investment options may appeal to different people depending on their investment goals.
Is Gold or Bitcoin Better for Hedging Against Stock Market Downturns?
The question of which asset makes a better investment choice in the gold vs. Bitcoin debate depends mainly on the investor. Someone with a high risk tolerance and plenty of investment capital may decide to invest in Bitcoin for a chance at higher returns. However, an investor who wants a proven safe haven asset to hedge against inflation with lower risks may choose gold over Bitcoin.
Talk to your financial advisor if you’re stuck in the Bitcoin vs. gold debate. They can help you decide which asset is worth investing in for your financial situation based on your goals and risk tolerance. They can also advise you on whether another investment opportunity would more readily help you reach your financial objectives.
Frequently Asked Questions About Gold and Bitcoin
Do central banks have digital currencies?
Banks do not currently have cryptocurrencies, but the Federal Reserve is exploring the potential advantages and disadvantages of central bank digital currency (CBDC). The future of these digital assets in central banks remains fluid at the time of writing.
Why invest in non-fiat currency?
Fiat currencies, such as the United States dollar, have value due to government backing. Market volatility, inflation, war, and other circumstances can result in a continual drop in the purchasing power of a fiat currency. Many fiat currencies around the world have failed after dropping to abysmal values.
People may invest in non-fiat currency and commodity investments to hedge against dropping fiat currency values. Gold, Bitcoin, and other non-fiat currency assets don’t rely on the dollar’s value and may provide a more stable and worthwhile investment compared to traditional stocks and bonds.
Visit this link to learn more about why gold is valuable.
How are Bitcoin and gold stored and traded?
Many people buy physical gold to play the strategic role of an inflation hedge in their investment portfolios. They have many options for investing in gold and other precious metals like silver and platinum. How gold or other precious metals are stored and traded depends on the type of investment.
Those who purchase physical gold may store it at home, often in a safe, but people can also create gold IRAs, invest in gold ETFs, and trade gold futures. In the case of a gold IRA, the investor stores their gold in an approved storage facility.
Bitcoin investments offer a similar variety without the tangibility of gold. People hold Bitcoins in digital wallets and use virtual exchanges to buy and sell coins. If you want to purchase Bitcoin, you may store it in your own Bitcoin wallet or trust custody of your coins to a broker.
Because no centralized authority tracks Bitcoin trading, people can lose their coins due to device failures and forgotten passwords with no way to recover their losses. Hackers also cause concern for some Bitcoin owners. Around $500 million worth of Bitcoin was stolen from former cryptocurrency exchange Mt. Gox in 2014, and this is just one example of hackers successfully stealing large quantities of cryptocurrencies.
Are gold investments safe?
Investors generally see gold and precious metals as safe investments, but whether or not they present a risky investment will depend on your financial situation. The gold price tends to remain stable over time, but no one can guarantee the future value of this commodity. Speak to a financial advisor to determine whether gold will make an effective inflation hedge for your portfolio.
Are Bitcoin digital currency investments safe?
Although some investors use Bitcoin as a hedge asset, others consider it too volatile. Before you buy Bitcoin as a hedge asset, assess your risk tolerance and consider talking to a financial advisor. Bitcoin can provide high returns but may also be much riskier than gold or another investment opportunity with better value stability.
When considering gold or Bitcoin for your next investment, keep the volatility of Bitcoin in mind. People may call Bitcoin “digital gold,” but they don’t quite behave the same way within the financial market.
Invest in a Gold IRA Through Oxford Gold Group
You may consider a precious metals IRA if you’re looking for an alternative investment to keep your retirement secure. Oxford Gold Group helps clients open new IRA accounts backed by physical gold. We can help you roll funds over to your new IRA account if you already have one.
When it comes time to purchase gold for your gold IRA, you can buy directly from us. We offer a wide variety of gold products as well as silver, platinum, and palladium.