Bitcoin has often been described as “digital gold” and is supposedly more popular with today’s younger generation than gold itself.
So, what needs to be considered when asking the question: what’s the difference between investing in gold or Bitcoin?
Bitcoin – Volatility, Returns & Value
Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer network without the need for intermediaries. Bitcoin is perhaps one of the most widely recognised cryptocurrencies or digital currencies that exist today.
Its volatility, extreme at times, has been astonishing. At the beginning of 2021 Bitcoin was valued at about $31,000, reaching a peak of just over $63,000 in April, then plunging to $30,000 in July and rallying to an all-time high of almost $68,000 in November of last year. In January 2022, it then plunged to a low of $35,000 and is currently trading at about $44,000. Bitcoin outpaced gold substantially in 2021, with the digital coin up nearly 55% and gold down by about 4%.
Cryptocurrencies such as Bitcoin have gained traction in finance worldwide thanks to dissent, greed, idealism, and fear of missing out. Fidelity, one of the world’s biggest asset managers, has even launched a Bitcoin exchange-traded fund (ETF), while other institutions including investment banks and hedge funds are now more interested in trading the coins and buying them for their clients.
Proponents of Bitcoin argue that it is a store of value and a safe haven asset. Bitcoin is a very high-risk investment with no guaranteed return because it’s a volatile asset. That means that the value of Bitcoin may rise or fall dramatically over a very short period – even as quickly as a few hours or days. Bitcoin is 12 times more volatile than the S&P 500 index and more volatile than gold. And as with all cryptocurrencies, Bitcoin has no intrinsic value.
Gold – an emotional, cultural & economic investment
According to the World Gold Council, gold has emotional, cultural, and financial value with people across the globe buying gold for vastly different reasons. Purchasing of the asset is often influenced by a range of national socio-cultural factors, local market conditions and wider macro-economic drivers.
The diverse uses of gold, whether in jewellery, technology or by central banks and investors, mean those different sectors of the gold market rise to prominence at different points in the global economic cycle. This diversity of demand and the self-balancing nature of the gold market underpin gold’s robust qualities as an investment asset.
Investing in Digital Currency
When opting for a safe-haven investment, Bitcoin or cryptocurrencies, more broadly, are certainly not the first avenue that comes to mind. Bitcoin’s sharp drop in value on various occasions in 2021 is a perfect example of the risks associated with crypto investing.
Cryptocurrency is still an extremely volatile investment, prone to big swings in short timeframes. As with any new investment, it’s important to do your research, and understand all of the risks. It would be prudent to follow the 5% rule – that is, to not contribute more than 5% of your portfolio to risky assets like crypto.
A digital currency behaves exactly like any riskier asset and performance is tied to risk appetite in financial markets. The value of a digital currency fluctuates according to risk-off/risk-on episodes as well as the overall sentiment in the financial markets. Bitcoin has proven to be highly correlated with stock markets over the last 12 months.
A report from the Financial Stability Board – set up by the G-20 in the wake of the financial crisis – warned that digital assets could soon threaten global financial stability. The report highlighted the scale of the asset class and their increasing interconnectedness with traditional finance and their structural vulnerabilities.
What is the digital currency market?
Bitcoin continues to lead the pack of cryptocurrencies in terms of market capitalization, user base, and popularity. Beyond that, the field of cryptocurrencies has expanded dramatically since Bitcoin was launched over a decade ago, and the next great digital token could be released tomorrow.
The crypto universe was valued at some $2.4tn in October 2021, a market value three and a half times what it was at the start of the year. That compares with the UK GDP of $2.7tn.
Gold vs Bitcoin
Which one is a better investment depends on your risk tolerance, investing goals, strategy, and how much capital you can handle losing. Consider buying Bitcoin if you want to speculate and join in the fervour for cryptocurrencies.
Bitcoin is young and unproven as an investment whereas gold has dominated the economies and markets for thousands of years as a means of exchange and holding wealth. Gold has been an asset that holds value over long periods and is used to hedge against market downturns. In a cycle of low and negative real interest rates and a hedge against economic, macro, and geopolitical uncertainty, gold is unrivalled as an asset indispensable in portfolio diversification and wealth preservation.
Gold has made a positive start to the year, outperforming bonds and equities as skittish investors scour the market for safe places to park cash. Fuelled by Russia-Ukraine tensions, concern that higher US rates could slow growth (recession fears), and the potential for an inflation-induced monetary policy error, gold has regained its lustre.
The relationship between gold and inflation-adjusted “real” interest rates was starting to weaken amid concerns about the economic outlook and rising prices. Typically, real rates are negatively correlated with gold. This is because higher interest rates make non-interest-bearing assets such as gold less attractive. But that has not been the case this year. As real rates have increased, the gold price has remained resilient.
Thinking of gold investment?
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.
