Portfolio diversification is a dependable tactic among all investors, but what are the best assets to diversify with? Goldman Sachs, a global investment banking service that provides financial resources to a wide client base of individuals and enterprise-size entities, recently released a research note stating that gold will outperform Bitcoin in the long run.
Some people may read this and think, “duh,” though many crypto enthusiasts found this prediction shocking. Bitcoin is one of the most well-known cryptos in circulation due to recent explosions and fluctuations in value.
It was only in the early 2010s, when Bitcoin took off, that investors began realizing the potential of cryptocurrency. Bitcoin started the movement.
However, is it really a movement that investors should be jumping on? The figures speak for themselves.
Bitcoin began in the late 2000s when forum members traded thousands of Bitcoins for just a few dollars at an absurdly low price of $0.00099 per Bitcoin. After the crypto officially launched in 2010, it slowly gained more traction and eventually reached $1 per Bitcoin by early 2011. Right after this jump, the value continued growing at exponential rates until it reached $30 per Bitcoin only a few months later, meaning those few initial traders who purchased tens of thousands for a portion of a penny were now reaping enormous rewards.
After this initial explosion, Bitcoin, along with many other cryptos, reverted to consistent levels of inconsistency. Volatility is the best way to describe Bitcoin. While that initial jump in 2011 was something all investors dream of getting in on, it’s non-repeatable and non-predictable.
Portfolio diversification with Bitcoin can easily land in disaster. The currency’s lack of tangibility makes it no different than investing in a “risk-on high-growth tech company stock,” according to Goldman Sachs, or, more simply put, “a solution looking for a problem.” To put it into perspective, immediately after its incredible price jump at the beginning of 2011, it dropped to $2 per Bitcoin before ending the year at only $4.70.
Investing in Bitcoin is more like catching lightning in a bottle. As more large players file for bankruptcy, that bottle gets smaller, and the lightning becomes more sparse. Recent events, like the collapse of the 3AC hedge fund and FTX exchange, show how Bitcoin’s volatility will only continue moving downward in the near future.
Diversifying with gold is a simple, predictable, and reliable tactic. Economic and societal factors like interest rates and inflation don’t negatively impact gold prices. Instead, gold continues to rise while Bitcoin drops by over 60%.
Because it’s a physical asset, industrial demand continuously drives gold prices. Unlike Bitcoin, gold actually performs well during volatile market periods, acting as a safe haven during recessions or a hedge against inflation. While investors may not make millions in a day off a gold investment, they can rely on steady returns over long periods of time with relatively low risks, regardless of the market environment.
In the last 100 years, gold has steadily increased in price. In 1969, one troy ounce was $41.10, while the average troy ounce in 2022 was $1,801.87. While the precious metal did experience occasional price dips during these periods, each decade showed general growth.
Many assets lose value over time. Fiat currency experiences inflation, digital assets suffer extreme volatility, and the real estate market involves high purchase prices and risks, but gold remains steady. Many investors can look back on gold’s history and closely predict how the prices may fluctuate in the next year, decade, or century.
According to Goldman Sachs, gold is a “useful portfolio diversifier,” given that it has lower chances of responding poorly to tight financial conditions. When all else fails, investors can still rely on the gold portion of their portfolio, whereas a Bitcoin backbone likely won’t hold much up.
When you compare both assets side-by-side, the results are obvious. According to Goldman Sachs, the figures show Bitcoin tanking by 75% while gold remains up year after year.
Before making any portfolio decisions, it’s important to remember the purpose of a portfolio diversifier. The reason investors don’t place all of their funds in one item is for asset protection. If one investment fails, you must rely on the others during poor economic times.
With this in mind, it’s clear why gold is a far safer and more reliable portfolio diversifier. Of course, investors can still gamble and try their hand at a crypto investment, though such assets cannot work as safety nets. As always, investors should consult their financial advisors to make the best decisions for their personal goals.