Gold vs Bitcoin: Can they play the same role?

Updated: Aug 4

What characteristics do they share? What are the main differences between these assets?

Gold and bitcoin, alternatives to fiat currencies.
Some wonder whether it can play the same role as gold. Canva

The growing popularity of Bitcoin and other cryptocurrencies over the past year has sparked the interest of many investors. Some social influencers question whether Bitcoin is able to play a similar role to gold. However, despite some similarities between the two assets; predominantly their limited supply and their role as an alternative to fiat currencies, there are also some fundamental differences that investors -and potential investors- should carefully consider:

1. The Dual Nature of Gold.

Gold has been recognized as an important and tangible store of wealth and a form of exchange for thousands of years. It is owned not only by individual investors but also by institutional investors and central banks all over the world. Gold has a growing use in technology and high-end electronics, and is extremely popular in jewelry, particularly in China and India, where it has strong cultural and religious connotations.

This dual nature of gold, whereby it is valued as both an investment and a consumer good, sets it apart from other investment assets. It has also often resulted in a strong performance of the yellow metal both during times of economic hardship and during times of economic growth. Conversely, cryptocurrencies such as Bitcoin are, of course, digital -not tangible- and the source of their demand is more concentrated, predominantly for investment.

2. Gold is a Scarce Natural Element.

Whilst both gold and Bitcoin are finite, gold’s above-ground stocks have been increasing by around 1.7% a year for the last 20 years. In contrast to this, Bitcoin stocks are currently increasing by around 3% per year, according to the World Gold Council. Furthermore, the cryptocurrency space has grown immensely in recent years, and there are now thousands of different types of cryptocurrencies, along with Bitcoin, available to purchase via various online platforms.

3. Bitcoin has yet to Prove Itself as a Safe Haven and its Volatility Risk is Much Higher than Gold.

At certain times, Bitcoin has been seen to display ‘safe haven’-like behaviors as it has appeared to move in a similar direction as some traditional hedges, including gold. However, there is no consistent trend in this behavior. For example, in March 2020, during the COVID-19 stock market crash, the price of Bitcoin dropped by more than 40% and ended the month 25% down. In contrast, while the gold price initially fell by 8% during the same period, it quickly rebounded back to the level it started, and continued the upward trajectory as investors continued to add hedges to their portfolios.

From November 2021 till the end of July 2022 the price of Bitcoin fell from almost $50,000 to $19,692, a 60% collapse. During that time the price of gold fell from $1,779 per oz to $1,752 per oz, a drop of 1.5% in US Dollars terms.

Gold has been trusted as an effective store of wealth for millennia. According to The World Gold Council, gold has offered a source of returns rivaling the stock market over various time periods, it has traditionally performed well during times of inflation and has a highly liquid and established market. Gold has played an important role as a portfolio diversifier and has frequently demonstrated a negative correlation to the market during economic downturns.

The cryptocurrency market is still in development and its price behavior appears to be driven by investors expecting high returns. Bitcoin has been much more volatile than gold over the last two years, therefore adding additional risk to investment portfolios. The World Gold Council suggests that portfolios with high allocations of Bitcoin -or cryptocurrencies- may benefit from higher allocations to gold due to its role as a hedge against risk.

Fundamentally, investors are regarding gold and cryptocurrencies as having very different roles within an investment portfolio. A 2019 survey by The World Gold Council revealed that investors view cryptocurrency as a more speculative investment and value it for its opportunity to achieve returns in the short term. Gold, on the other hand, is valued for its strategic role in preserving wealth over the long term and for its position as a hedge against riskier investment options.

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