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During periods of inflation and economic uncertainty, investors always look for safe and profitable assets to hedge against potential losses. Gold has historically been such a safe-haven asset, but now many investors are choosing bitcoin to fulfill the same need.
Gold has been used as currency and a store of value for thousands of years, so how can a relatively new digital currency offer risk-averse investors similar benefits? Read on for a breakdown of gold vs. bitcoin, which includes tips to help you make informed investment decisions. We'll also provide some insight into alternative investments that blend features of both assets.
As always, be aware of the risks associated with any investment, but particularly those associated with higher-risk investments like bitcoin.
Bitcoin vs. gold: a brief history
When it comes to gold and bitcoin, no two assets could be less alike. Gold is a physical asset that served as the basis of international currency for hundreds of years. Alternatively, bitcoin is a recently developed cryptocurrency whose value is based on the perceptions of those who buy and sell it.
The two are uncorrelated assets, meaning the price of one has no impact on the other. Gold, for example, is correlated to the U.S. dollar: When the price of the dollar increases, the price of the gold usually decreases, and vice versa. But with gold and bitcoin, there’s no correlation.
Gold is a tangible asset with inherent value, unlike stocks, bonds or fiat currency. Investors turn to gold because its value isn’t tied to the performance of any industry, sector or company, making it an excellent store of value and a safe-haven asset.
One of the primary reasons to invest in gold is precisely that resilience to market forces. Gold is a hedge against inflation, meaning it retains or grows in value even when the value of fiat currency declines.
However, investing in gold is not without its disadvantages. Buying physical gold requires secure storage and insurance, and there are significant tax consequences to be aware of.
Anyone unfamiliar with bitcoin — or crypto markets in general — should research its risks and if it’s a match for their risk tolerance. Even if you find yourself asking whether your crypto is safe (or what HODL means), there’s no question that bitcoin has changed the world since its inception.
While gold has been used by humans for thousands of years, bitcoin has only existed since 2009. It’s a digital currency created by an anonymous developer under the pseudonym Satoshi Nakamoto.
It’s also a decentralized currency, meaning it isn’t controlled by any government or financial institution. Instead, it relies on software known as the blockchain. The blockchain is essentially a complex algorithm with built-in transaction verification and documentation. The blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together.
One of the primary advantages of investing in bitcoin is its highly liquid nature. Transactions occur within minutes, if not seconds, allowing investors to buy or sell the crypto quickly. What's more, there's no need to go through an exchange, brokerage firm or other financial institution, though some of those centralized platforms do offer it.
While bitcoin is subject to taxation and regulation, it was designed to operate independently from outside entities like central banks or governments that might try to control or influence the digital currency like they do with fiat currency. This makes it a more flexible and agile asset, as investors can buy and sell as often as they wish.
Bitcoin’s real-world value is increasing, as well, reinforcing its place as the most appealing crypto available today. For example, bitcoin debit cards have partnered with major payment-processing companies like Mastercard and Visa to allow you to spend the digital currency for goods and services. More businesses are beginning to accept bitcoin as payment, including Airbnb, Autozone, Best Buy, Microsoft, Overstock, Shopify and Tesla, among hundreds of others.
However, no investment is without risk. While bitcoin may be attractive because of its liquidity and ease of transfer, these qualities also contribute to one of the chief downsides of the asset: high volatility. The value of bitcoin can fluctuate rapidly, making it a higher-risk investment.
A comparison of bitcoin and gold
The juxtaposition of one of the world’s oldest assets and one of the newest makes for an interesting analysis. The nature of each asset makes them attractive to investors for different reasons. The following are a few ways the two investments contrast.
Though the price of gold can fluctuate as it's traded on exchanges around the world, it retains its value well over time, and large, rapid swings are historically uncommon.
Gold is considered one of the most stable assets in which you can invest. In fact, between 1981 and 2005, the precious metal remained in a range of $250-$500/troy ounce.
Bitcoin, however, is much more volatile and subject to considerable swings in price, making it more prone to upside and downside risk. For example, from Jan. 1, 2021 to Nov. 12, 2021, bitcoin gained 100%. Then from Nov. 16, 2021 to Nov. 16, 2022, it lost 74%.
Hundreds of billions of dollars of gold transactions occur each day, but gold must be traded through approved exchanges and is subject to regulatory and tax oversight. Because of this, it can take some time to either buy or sell the physical asset. Another limit on gold’s liquidity is that it’s subject to commodity market trading hours.
In contrast, there are only hundreds of thousands of bitcoin transactions each day. The bellwether crypto has only a fraction of gold’s market cap, but in the first half of 2023, daily trading volume ranged from around 188,000 to around 682,000 transactions.
However, because there are no regulatory bodies or central exchanges overseeing it, bitcoin is an exceptionally liquid asset that allows investors to get into or out of investments within minutes. Additionally, crypto markets are open 24 hours a day, seven days a week, meaning bitcoin transactions are not limited by market hours and can be bought and sold all day, every day.
Because bitcoin isn't regulated by a central authority, it's an attractive investment for anyone who wants to adopt an agile, responsive investment strategy. The trade-off for this flexibility is consumer safety. The lack of regulatory oversight makes bitcoin scams commonplace, and defrauded victims have no clear path to recourse.
Gold, a more secure and safer investment, is heavily regulated, which is no accident. Purchasing the physical metal is one of the safest transactions possible, as going through an exchange is the principal way to buy gold. While fraud is never impossible, it’s improbable on established gold exchanges.
While the best crypto exchanges take steps to ensure all bitcoin that passes through them does so securely, fraud has been committed by some exchanges, while others have failed due to mismanagement or liquidity crises.
In the U.S., gold sold within one year of its purchase date is taxed at the regular income tax rate. Gold sold after this period is subject to capital gains tax, which is generally lower than income tax and therefore is advantageous to investors.
While bitcoin is subject to taxation, each sale is taxed as either a short-term or long-term capital gain, making rapid transactions and daily profit-taking possible without significant tax liability.
Both gold and bitcoin are relatively secure investments. Gold is stored in vaults or safes, with investment-scale transactions passing through highly regulated centralized exchanges, like the London OTC market, the U.S. futures market and the Shanghai gold exchange.
Bitcoin security relies on unbreakable cryptographic code central to its design concept. Bitcoin isn’t insurable, as it isn’t a tangible asset. Though bitcoin transactions are protected by cryptographic code, even the best crypto wallets are only as secure as you make them. Weak physical security surrounding the device(s) you use to access your bitcoin can result in unauthorized access or theft.
If you’re new to bitcoin or you’re wondering what a crypto wallet is, research security and wallet storage options before investing in the crypto.
The total value of gold vs. bitcoin
As of July 2023, it’s estimated that the entire value of all the gold ever mined is around $12.25 trillion. In contrast, the overall market cap for bitcoin is roughly $569 billion.
The pros and cons of investing in gold
Gold is a popular investment asset due to its stability and reliability, making it an ideal hedge against inflation and recession. This is also why gold is seen as a safe-haven investment during periods of market volatility.
However, gold isn't a particularly liquid asset, making it difficult to buy or sell quickly. Buying or selling gold is also subject to government regulation, which can make the process more cumbersome.
The pros and cons of investing in bitcoin
Bitcoin, in contrast, is a highly liquid asset. Unlike gold, trading the crypto is not subject to government regulation, making it more flexible. Bitcoin also has the potential for high returns, as its value can rise rapidly.
However, this volatility makes it a risky investment, as it can just as quickly lose value. Bitcoin prices can also vary substantially throughout a given day, making it a highly speculative short-term investment.
Which is the better investment: gold or bitcoin?
Determining whether gold or bitcoin is the more beneficial investment depends on numerous factors. If you’re looking for a stable and reliable asset that has retained its value over time, gold may be a good choice. While gold doesn’t provide the opportunity for outsized gains, it’s inherently less volatile than bitcoin.
Gold is often embraced by investors as part of a diversified portfolio strategy, since it’s viewed as a hedge against economic uncertainty, market volatility and inflation. Deciding whether gold is a good investment for you depends on your goals and risk tolerance.
On the other hand, if you’re looking for a highly liquid asset with the potential for big returns, bitcoin may be a better investment for you, provided you have the tolerance for the elevated risk bitcoin and other types of crypto investments bring with them.
It’s important to note that both gold and bitcoin can be valuable assets to include in a diversified investment portfolio, as each serves different functions. The stability of gold can offset the risk brought by the volatility of bitcoin. Conversely, bitcoin’s volatility can bring opportunities for sizable returns, compensating for gold’s slow-and-steady climb in valuation.
What is bitcoin gold?
Bitcoin gold is an open source crypto that was created in 2017 as a “hard fork” of the original bitcoin blockchain. A hard fork essentially is a new evolutionary branch of an open-source software project’s development caused by some significant change in the function or performance of the underlying code.
In the case of bitcoin gold, a change to the central protocol of how transactions are processed meant future tokens representing each transaction would be incompatible with the established bitcoin blockchain.
Bitcoin gold was created to address issues with the original bitcoin blockchain code, like the centralization of mining power and an increase in the difficulty of bitcoin mining. Bitcoin gold uses a different mining algorithm, making it much more accessible to individual miners. The established bitcoin mining environment tends to be dominated by large “farms” of machines, though some of the best bitcoin mining software can help offset some of the disadvantages for those interested in doing it on a smaller scale.
Is bitcoin backed by gold?
Bitcoin is a digital currency that isn’t backed by gold, any other commodity or any physical assets.
Can you buy gold with bitcoin?
Though you can make gold purchases through regulated exchanges, you can also buy gold with bitcoin. The process of buying gold will vary depending on the broker you use, but some online gold dealers accept bitcoin as payment.
How to buy gold with bitcoin
To buy gold with bitcoin, you’ll need to find an online gold dealer that accepts bitcoin as payment. You can then place an order just as you would ordinarily do. You’ll be given a bitcoin wallet address to send funds to and the receipt verification once the transaction is processed, which only takes a few minutes. Once your bitcoin is received, the exchange or dealer will arrange for secure shipment or storage of your gold.
Is it possible to sell gold for bitcoin?
While it’s entirely possible to sell gold for bitcoin, there’s no established method. You would have to find a buyer willing to purchase the quantity of gold you’re selling. Both parties must meet legal requirements and perform due diligence in proving authenticity and purity.
This is a much more complicated endeavor than selling gold for cash or buying gold with bitcoin, as fewer buyers are willing to use bitcoin for such a purchase as it would provide fewer protections than traditional methods of selling gold or purchasing bitcoin.
Summary of gold vs. bitcoin
As investments, gold and bitcoin both have their advantages and disadvantages. Gold has a long history of retaining its value over time, but buying or selling the physical precious metal requires more time and effort.
Contrarily, bitcoin is both highly liquid and highly volatile. While you can buy and sell it quickly while also largely avoiding government or regulatory oversight, these traits make it a much riskier asset. It can fall in value significantly in days or even hours.
However, both gold and bitcoin can be valuable assets. There are ways to invest in gold beyond purchasing the physical metal, which can make its benefits outweigh its disadvantages, like the high cost of entry or concerns about secure storage. Just as there are gold ETFs or exchange-traded funds leveraged to the value of gold, some of the best bitcoin ETFs can provide similar performances while offering some protection against bitcoin’s elevated volatility.
The debate about whether gold or bitcoin is the better investment is complex. There are pros and cons to each asset, and the best investment strategy will depend on your circumstances and preferences.