What are the fundamental similarities and differences between gold and cryptos? Can bitcoin replace the yellow metal as an inflation hedge? Take a look at our essentials guide.
The crypto industry has been on a whirlwind ride.
In late 2022, the cryptocurrency market was tormented by scandals, falling prices, and investors fleeing the industry for safer havens, including gold and precious metals.
This has led some investors to question whether cryptocurrencies and Bitcoin, in particular, are able to play a similar role to gold within an investment portfolio.
Let’s start with the basics and take a look at the key similarities and differences between gold and cryptocurrencies.
Gold and crypto: how are they similar?
Both gold and bitcoin are in limited supply
While gold has been in use for centuries, it has a finite supply. In the same way, Bitcoin's total supply is just 21 million.
Both gold and bitcoin are alternatives to fiat currencies
Gold was used as money in the past and can be converted to cash in almost any currency. Bitcoin, meanwhile, is being increasingly integrated into various global payment systems.
However, comparing gold’s and bitcoin’s use as a form of payment, bitcoin might hold an edge, since it is a fixed unit of account that's easily divisible and transportable.
Gold, in contrast, might not be as easily divisible on the spot, especially if you own bigger gold bars.
Gold and crypto: how are they different?
Gold has been around much longer than bitcoin
Bitcoin first appeared in 2009, so, as an asset, it hasn't even reached adulthood. Gold, however, is what you might call its elder peer, as its history dates back more than 5,000 years.
You can touch gold, but you can’t touch bitcoin
Bitcoin is a digital currency that exists only digitally and can be bought only online. So, obviously, you can’t actually touch it, unlike gold bars and coins.
Gold, in contrast, is a physical asset that you can touch and buy online or in a physical store.
💡Investing in gold: Check out our beginner’s guide.
Gold is usually considered a safe haven, but bitcoin is not
According to the World Gold Council, bitcoin isn't a safe-haven asset because it's highly speculative and volatile. In contrast, gold has a track record of acting as a safe haven.
💡Read our SPOTLIGHT to learn how gold acts as a safe haven in times of crisis and market turmoil.
In late 2020, analysts at Goldman Sachs said they do not see the rising popularity of bitcoin “as an existential threat to gold’s status as the currency of last resort.”
💡What is a safe-haven asset?
A safe-haven asset is a financial instrument that is expected to hold its value during an economic downturn.
Because safe-haven assets are usually uncorrelated or negatively correlated with the economy, a market crash could sometimes even boost their value.
Bitcoin has historically been more volatile than gold
Like many assets, gold prices go up and down, but not as much as bitcoin.
Since launching, bitcoin prices have been 4-5 times more volatile than gold’s. According to Bloomberg Intelligence, Bitcoin’s average intraday price change in the past three years has topped 5%, while gold’s volatility has been somewhat stable.
Take a look at the chart below that compares gold, bitcoin, and stock market volatility in 2022.
As you can see, by the end of the year, gold was up 4%, while bitcoin dropped 18%.
💡Read our SPOTLIGHT to learn why cryptocurrencies are so volatile.
Gold and crypto: which is the better inflation hedge?
With inflation raging around the world, many investors are looking for anything to minimize its impact on their portfolios.
Many world currencies used to be backed by gold, so it’s no surprise that gold is one of the most commonly used assets to hedge against inflation.
💡What is an inflation hedge?
An inflation hedge is an asset that is intended to hold or increase in value over time, thus protecting your investment portfolio from inflation.
In other words, a hedge can go up in price as inflation rises or may be relatively resistant to inflation, providing some stability to your investment portfolio.
More recently, bitcoin and other cryptocurrencies have grown in popularity as alternative inflation hedges because, like gold, they’re limited, currency-like assets.
So which one is better?
Well, experts usually compare Bitcoin and gold as inflation hedges based on a number of factors:
- their history
- effectiveness
- ease of access
Gold’s and bitcoin’s history as an inflation hedge
As inflation hedges, gold has a strong track record, while Bitcoin has barely more than a decade of history to back it up.
As Adam Perlaky, senior analyst at the World Gold Council, explains, “There’s really no historical data on Bitcoin as an inflation hedge, There’s no data to back it up.”
At least for now.
Some experts say cryptocurrencies could become an effective defense against central banks printing unprecedented amounts of money.
Because Bitcoin has a finite supply and is limited to only 21 million coins, it could provide an alternative to the fiat money system in the future.
Effectiveness as an inflation hedge: how gold and bitcoin compare
Let's see what savers and investors like you have to say on this one.
A recent survey by Hall & Partners and the World Gold Council shows investors' attitudes toward gold and bitcoin and how effective they are as inflation hedges.
As you can see, one-third of investors see their gold investment as either “a store of value” that protects their wealth or as “a safe investment” they don’t have to worry about.
Meanwhile, bitcoin is mostly viewed as “a high-risk investment with potential for high returns” or as a “purely speculative bet.”
Even so, the study shows that cryptos were one of the most popular investments in 2021, with 31% of respondents investing in cryptocurrency within the first 10 months of the year.
Ease of access: how gold and bitcoin compare
Overall, Bitcoin and gold are both relatively easy to buy.
Buying physical gold, however, might come with certain shipping and logistics requirements, unless you choose to store your gold bars and coins in secure vaults. Cryptos, on the other hand, can be purchased through crypto exchanges or through brokers.
The bottom line is, while gold has a long-established history as an inflation hedge, bitcoin and other cryptos still lack longevity to be considered as such but have the potential to become an alternative to fiat currencies.
What are the key takeaways?
- Despite a few similarities, gold and cryptos are fundamentally different assets playing different roles in your investment portfolio.
- While cryptocurrencies can potentially bring some high returns, they can also add significant risk.
- Considering how volatile cryptos are, you might want to mix in some gold bullion to balance things out.
Learn how gold and crypto can complement each other in your investment portfolio.
