For centuries, gold has been a medium of exchange and treated as the most valuable asset all over the world. It has traditionally served multiple purposes like being used as a gift or traded as a commodity asset. The value of yellow metal has risen consistently for many decades now. Bitcoin, on the other hand, has witnessed a meteoric rise, breaching new records and scaling all-time highs. More investors and crypto enthusiasts are now comparing the two to assess the value they bring.
Historically, gold has been considered a safe-haven asset. During a financial crisis or recession, the yellow metal has been often used as a hedge against stock market volatility. Bitcoin, meanwhile, has been dubbed “digital gold” in the past and it’s a fair comparison with gold as they share similar characteristics.
Bitcoin and gold both have significant advantages over fiat currencies because neither can be diluted or debased and both are often seen as ways to diversify a portfolio.
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With gold moving sideways and cryptocurrencies seeing a resurgence over the last two years, one cannot say which one’s better.
While Bitcoin may not be a safe-haven asset yet, it has the potential to become one, since it is expected to increase in value and retain it during times of economic turbulence owing to its uncorrelated status. In a study conducted by Fidelity Digital Assets, it was noted that eight in 10 investors surveyed felt digital assets (cryptocurrency, tokens, Bitcoin ETF, etc) have a place in their portfolio. In both the US and Europe, exposure to digital assets has increased year over year. Almost nine in 10 respondents said they find digital assets appealing. This figure has grown across regions surveyed in prior years. Overall, investors now hold a more positive view of digital assets than they did the past two years.
Gold is Trusted
Gold has been present since ancient times. The deepest gold mines of the ancient world were present in the Maski region, modern-day Karnataka. The gold that was mined was used to make utensils for the royal family and used in temple rituals. From then to the current jewellery industry, gold has always had value and is considered a safe and reliable asset. A key reason why people respect gold is that it has stood the test of time and proven itself as a hedge against uncertainity, given its real and scarce nature. Whereas Bitcoin, which has been around for less than 15 years, has not faced any big financial crisis such as the Great Depression (even though it was created specifically to avoid such a crisis).
Important establishments like the central banks, significant government organisations, pension funds, and astute wealth management offices have had a portion of their assets invested in gold, in fact managing adequate gold reserves against their fiat currencies is a key action to regulate central banking.
On the other hand, Bitcoin is taking another step towards mainstream adoption. Banks have realised that their customers are increasingly putting their money in crypto exchanges like Coinbase, Kraken and other platforms. To combat this, many small banks and giants like Morgan Stanley, Goldman Sachs and JP Morgan are now offering Bitcoin funds to their clients.
Banks have relegated bitcoin to ultra-high net worth individuals and family offices with tens of millions of dollars. Currently, 52 per cent of investors surveyed globally have an investment in digital assets, with Asia and Europe seeing higher rates of investment than the US. Current ownership of digital assets was largely dominated by the two leading cryptocurrencies: Bitcoin and Ethereum. Around 37 per cent of investors surveyed own Bitcoin in their (or a client’s) portfolio, while 20 per cent own Ethereum.
Rise of Bitcoin and cryptocurrency
The new generation does most of their transactions virtually and dislikes carrying cash. They are more comfortable with online and mobile transactions. While gold is tangible, cryptocurrency isn’t. The tangibility argument doesn’t make much sense to the new generation anyhow.
Bitcoin\’s exponential growth has given millennials access to a digital asset far more rewarding than gold. Bitcoin even at a code level is guaranteed to be deflationary and as such cannot enter hyper-inflation. Furthermore, the transactions cannot be controlled and restricted by the government. In Asia, 100 per cent of financial advisors, 86 per cent of high-net-worth investors, and 53 per cent of crypto HF/VCs surveyed currently invest in digital assets.
Also, Bitcoin is a flexible asset. One can access it from anywhere as long as they have a computer and an internet connection. Gold, on the other hand, cannot be carried in times of a crisis or sold in small factions. Another important characteristic of Bitcoin is that it is finite, which means that there will only ever be a total of 21 million Bitcoin in circulation. BTC halvings cut the reward for mining bitcoin transactions by half. This event also cuts in half Bitcoin\’s inflation rate and the rate at which new bitcoins enter circulation. So, this deflationary feature of the digital asset has the potential to increase significantly in value.
The two assets have a few things in common too:
Rarity: Both gold and bitcoin are scarce resources and cannot be printed like money. It is predicted that by 2140, all 21 million Bitcoin would be in circulation due to mining.
Transparency: Gold has an established system of trading, weighing and tracking, which is precise. It’s very hard to steal it, pass it off as fake or corrupt the metal. Bitcoin is also difficult to corrupt, thanks to its encrypted, decentralized system and complicated algorithms, making it one of the most secure systems being developed for the future as it is tough to manipulate.
Liquidity: Both gold and bitcoin have very liquid markets and can be exchanged for fiat money.
Baseline Value: Gold has myriad applications from luxury items like jewellery to specialized applications in dentistry, electronics and more. In addition to ushering in a new focus on blockchain technology, bitcoin itself has tremendous baseline value as well. Billions of people around the world who lack access to banking infrastructure and traditional means of finance, like credit can send value across the globe for close to no fee.
That said, Bitcoin\’s true potential as a means of banking for those without access to traditional banks is yet to be fully developed.
So which is a prudent investment?
Is bitcoin then the new shining gold? While gold has a special place in the heart of every Indian, the return of investment on Bitcoin cannot be missed by an investor. It is important to realise a new era is coming even though cryptocurrency is a volatile and risky investment. Gold has grossly underperformed while cryptocurrency has seen an annual return of close to 230 per cent in the last 10 years. With these pointers in mind, it is important to have a balanced investment in cryptocurrency as they are just going to continue growing with time, in spite of the high volatility factor.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)