Gold and bitcoin are weird.
None of them are particularly useful here and now in a practical sense. Bitcoin’s promise as a deregulated digital currency remains just that – a promise. And no one carries around gold in their hip pocket to buy goods or services anymore.
Although both are “mined”, their only real or virtual applications seem to be as tools for pure speculation – or as safe assets. When the world goes half a bubble, people flock to gold. More and more, they also seem to be flocking to bitcoin.
The price of an ounce of gold and a single bitcoin was affected by Covid-19. Both prices jumped dramatically after governments and central banks around the world pumped money into consumers’ wallets (and banks’ coffers) in response to the global recession.
Many investors are unsure of what place, if any, any of the assets have in the portfolio. Here’s what you need to know to understand how bitcoin and gold can fit into your investment strategy.
Gold is not much of an inflation hedge
First, the bottom line: You can add gold to a well-diversified portfolio of stocks and bonds, but experts say it shouldn’t make up more than 10% of your holdings.
That said, it’s important to know why you’re adding gold to your inventory. If it’s to stave off inflation, think again. While research shows that the value of gold remains constant over a very, very long period of time – like a millennium or two – it can’t really be considered a store of value over a more modest period of time. It is simply far too fleeting.
In fact, gold is as volatile as the S&P 500, says Duke professor and senior adviser to Research Affiliates Campbell Harvey, and its returns typically don’t beat those of the broader stock market over the long term.
So why should you invest in gold?
Gold is better understood as a safe haven that investors embrace when times get rough. For example, at the end of 2018, the S&P GSCI Gold Index rose 7.2%, according to Morningstar data, while the stock market fell nearly 14%.
But gold volatility can go either way. Nearly a third of fund managers surveyed in the August 2020 Bank of America Global Fund Manager Survey said they believed gold was overvalued – the highest this sentiment has been since 2011, and up from 0% the previous month.
To put that into context, SPDR Gold Shares, a popular gold exchange-traded fund (ETF), gained 9.6% in 2011 and then 6.6% in 2012, before losing 28.3% in 2013 and then delivering negative returns. the following two years.
Gold should therefore be treated as hot sauce rather than the main course of your investment portfolio.
Why invest in Bitcoin?
Bitcoin is an electronic payment system that exists outside the control of any central government. While people have been using gold as a medium of exchange for 5,000 years, since ancient Mesopotamia if not earlier, bitcoin is a much more recent affair. It was invented by a person, or people, known as Satoshi Nakamoto in 2009. As a new venture, it has endured wild price swings during its nearly decade-long run.
The cryptocurrency rose to nearly $20,000 per bitcoin by the end of 2017, before falling to less than $4,000 by the end of 2018. In 2020, bitcoin bounced around right along with stocks and gold. Its value fell by about half to about $5,000 USD from mid-February to mid-March 2020, as investors first became aware of the effects of the coronavirus. But it jumped to nearly $11,500 USD five months later.
In 2021, Bitcoin’s value reached new heights. When Coinbase, a cryptocurrency exchange, went public, prices reached over $60,000 USD. However, this was followed by fluctuations in value: It fell 50% in July, but rebounded to $68,789 USD in November, a record high. In December 2021, Bitcoin experienced another steep decline, falling to $46,164 USD.
In 2022, between January and May, Bitcoin’s price has continued to decline gradually. Closing rates only reached $47,445 at the end of March 2022 before falling further to $28,305 in May. This marked the first time since July 2021 that Bitcoin closed below $30,000 USD.
On June 13, 2022, crypto prices plunged. Bitcoin fell below $23,000 USD for the first time since December 2020.
These dramatic price swings tend to be larger than what you even see with gold, and so the digital currency cannot be seen as a way to store value, as some like to claim – at least not yet.
That said, “the entire crypto ecosystem has matured significantly,” said Stephen McKeon, associate professor of finance at the University of Oregon. “The question has shifted from ‘will this survive’ to ‘how big will this be?'”
Fidelity recently announced plans to create a bitcoin fund, although it will only be available to large institutional and accredited investors. Still, these kinds of moves could ultimately increase bitcoin’s liquidity and help smooth out its wild price swings.
Why do investors buy Bitcoin and gold?
Both gold and bitcoin tend to attract investors as central banks around the world step in to rescue struggling economies. The reasoning works roughly like this:
Governments reduce the value of their fiat currencies (currencies backed by the full faith and credit of a nation or group of nations) when they print a lot of money and lower interest rates to near zero. Investors respond by putting money into currencies that are not controlled by central authorities.
Also, when interest rates are so low, and especially when inflation-adjusted rates are negative, investors are less enamored of yielding assets such as bonds and dividend-paying stocks.
This can induce a bandwagon effect, where each new investor keeps the price of a safe-haven asset rising, even if they buy at an increasingly higher price. The danger is that a new event or development breaks the momentum and investors panic. Then you have the dubious honor of buying high and selling low.
What are the differences between gold and bitcoin?
Gold and bitcoin represent different phases of how people think about “money”. Gold was a currency for thousands of years, and it retains its value in part from the psychological and historical connection investors have with it. Bitcoin, along with blockchain technology, hopes to one day replace government currencies as the means by which people exchange payments.
As an investment, gold is a more mature asset. As such, it tends to be easier to own. For example, you can buy SPDR Gold Shares, which have an expense ratio of 0.40%, through your brokerage account. There is really no reason to commit to owning physical gold, with its high cost of safe storage.
With Bitcoin, the most common way to invest is to open an account on a cryptocurrency-specific exchange, such as Coinbase, and actually exchange your dollars for the digital currency. You must then keep it in a digital cryptocurrency wallet.
More generally, investing in gold reaffirms your faith in the current international financial system, while bitcoin is a bet that a more radical alternative is coming.
“The thing about crypto is that it’s poised to disrupt a huge segment of the financial industry,” McKeon said. “Decentralized financial applications have now replicated many traditional lines of business such as trading, lending and insurance.”
Should you invest in gold or bitcoin?
You don’t need to invest in either gold or bitcoin to have a well-diversified portfolio. Most investors would do well to ignore their lure and instead own a combination of index funds and bond funds. Most major investment companies offer affordable options, and you can spread how much you invest with each based on your age and risk tolerance.
If you want to make a speculative bet on either gold or bitcoin, do so with a small, single-digit portion of your holdings. There is insufficient evidence to suggest that either will provide more consistent returns than a traditional strategy that emphasizes stocks and bonds.
