The COVID-19 recession may have made you think about how to preserve your wealth. Many investors see store of value assets like Bitcoin and gold as ways to preserve wealth. For example, gold has thousands of years behind it as a universally recognized safe-haven asset and hedge against inflation. But the precious metal has been compared to a new asset, Bitcoin, as well as other cryptocurrencies. Over the past decade, the price of Bitcoin has skyrocketed. Both assets promise benefits like diversification, but also come with their own drawbacks.
Consider working with a financial asset when looking to make your portfolio recession-proof or inflation-proof.
Advantages and disadvantages of Bitcoin
The concept of Bitcoin was created as a peer-to-peer electronic payment system by an anonymous figure in 2008. Under the pseudonym Satoshi Nakamoto, this person (or group) described the system, which allows two parties to ” carry out transactions directly with each other. without involving a third party.
The popularity of Bitcoin has increased due to several factors: It is a portfolio diversifier like gold. It also has the potential to be a long-term store of value with a fixed supply that protects its value, unlike fiat currencies, which are government-issued currencies not backed by a physical commodity and controlled by central banks. .
The fascination with cryptocurrency has led to a number of staunch supporters. Those who trust the asset think its price increases are just the tip of the iceberg. Figures such as Galaxy Digital CEO Mike Novogratz predict the investment will exceed the market cap of gold, which currently stands at over $ 11 trillion, within just a few years. Some even call it “digital gold”.
However, the socially responsible investment (SRI) movement criticizes Bitcoin because mining digital currency consumes massive amounts of energy. A consequence of this is that an initial supporter of Bitcoin, Tesla, recently abandoned its acceptance of the cryptocurrency. When CEO Elon Musk cited the environmental cost of mining as the reason for the suspension, the price of Bitcoin plunged.
There are also concerns about the security of digital currency exchanges due to the potential for security breaches.
Advantages and disadvantages of gold
Gold has been considered an exceptional store of value for millennia and still is. In addition, it is a tangible asset that people can easily pass on from generation to generation. The culture around gold is one of its benefits. It is a general public asset accessible to traders from all walks of life in various economic situations. So even if retail investors don’t understand cryptocurrencies, they can buy gold.
And people aren’t the only ones who trust gold. Central banks also rely on its value to contribute to economic stability and growth. The United States itself used the gold standard until the 1970s, which some investors argued was a safer option due to the volatility of current currencies. Others also believe that this reliability and longevity can outlive cryptocurrencies, such as Goldex CEO and founder Sylvia Carrasco. Carrasco points out that several cryptocurrencies have been banned and that Bitcoin could suffer the same fate.
But that doesn’t mean that the value of gold is always the same. Its price has fluctuated over the years and it does not generate current income like other investments.
Gold also has an environmental impact. All mining operations present possible risks, including water pollution, toxic emissions and loss of biodiversity. It also has a history linked to human rights violations and the financing of armed conflict.
Bitcoin vs Gold: comparing the two options
Gold is trusted by many investors. Although Bitcoin is not old enough, its growing popularity reflects genuine investor interest. So let’s compare what they can offer you.
Bitcoin and gold are both rarer than other assets. Right now, there are only 18.79 million bitcoins in circulation, but that will eventually hit a cap of 21 million. Gold is also finite, as are many other natural resources. The law of supply and demand augurs higher prices for both.
Security and transparency. Gold carries less risk than some other investments. The current system in place to trade it is relatively solid and it is difficult to corrupt the asset. Bitcoin traders are also immune to corruption due to its encryptions, lack of a core system, and complex algorithms. However, there are some security concerns. Simple mistakes can be disastrous, and cases like the Mt. Gox Demise have resulted in significant losses.
The two assets share the same characteristic of high liquidity. Gold is generally considered to be one of the most liquid assets; there is always a reliable population of sellers and buyers waiting. So you can convert it to cash without losing a large amount in the process. Likewise, Bitcoin has great liquidity most of the time.
Gold is not as volatile as Bitcoin. The price of Bitcoin can fluctuate violently, which is the norm for cryptocurrencies. The scarcity and absence of a central authority contribute to this as well as popular culture. Political and social trends influence cryptocurrency to a greater degree than gold, making the latter the more reliable option. For example, the price of Bitcoin rose from less than $ 1,000 in 2017 to over $ 19,000, falling back to $ 8,000 in mid-2018.
Reference value. Gold has many uses, from jewelry to dentistry to electronics manufacturing. It also does not tarnish and is easily transported. Bitcoin has contributed to real applications of blockchain technology. It also supports a global population that does not have access to traditional or banking methods of financing,
Bitcoin vs Gold: which one is right for you?
Diversifying a portfolio can help mitigate risks and potential losses. Most investors incorporate this tactic into their investment strategy in one way or another; many argue that bitcoin and gold can help. Bitcoin is considered an uncorrelated asset, which means that it is not directly linked to the stock market. Thus, a small allocation to Bitcoin in a traditional account has the potential to improve returns without a significant increase in overall volatility.
Gold can also protect your finances through diversification. It can also help protect you against inflation or a financial crisis as it tends to move against the dollar. Investors who want more security would be better suited to this option.
By comparison, Bitcoin is the riskier choice overall. It is decentralized and unstable, which can lead to significant losses. While many investors want to be on the cutting edge of technology, only those who are willing to accept the potential costs of cryptocurrency should consider adding it to their portfolio. Gold also comes with some risk, but it has a longer history, making it easier for investors to plan their buy or sell, thus protecting them.
However, any investor interested in Bitcoin should know that changes happen every day. One of the asset’s greatest strengths is its global reach, but its limits can increase. As an example, China recently banned Bitcoin mining. This decision could also pave the way for new laws and regulations in other countries.
The bottom line
Gold and Bitcoin each have a role in the market. Each has its advantages and disadvantages that will appeal to certain types of investors. Bitcoin promises potentially high returns and diversification, but at the expense of security. Gold provides better risk management when you add it to your portfolio because it is regulated, but less promises of return. In addition, both choices come with ethical concerns.
Tips for investing
Every investor has a set of goals. Some prefer to minimize risk by protecting their money, so they choose stable investments. Others prefer to maximize their profits and accept increased volatility. There is no perfect strategy; it all depends on the investor – and good financial advice. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
Bitcoin may be relatively new and exciting, but it’s not the only alternative asset. Investors can diversify their portfolio through a wide range of alternative investments, including real estate, fine arts and more.
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The article Bitcoin vs Gold: What should you buy? first appeared on the SmartAsset blog.