Gold or Crypto: Which is the Better Buy?

Don’t look now, though Bitcoin (BTC -0.30%)-is-digital-gold argument returns. During the crypto market meltdown, no one wanted to hear that Bitcoin was digital gold because the price of Bitcoin fell. But now that the worst of the crypto market selloff appears to be behind us, and the price of Bitcoin appears to have stabilized around the $20,000 level, traders are once again talking about Bitcoin as a potential safe haven asset.

Adding fuel to the fire, Ethereum (ETH -0.82%) co-founder Vitalik Buterin recently suggested in a Twitter thread that “crypto is the best option” compared to gold. If anything, Buterin’s comments take the argument one step further. It expands the web to include all crypto, not just Bitcoin. And it suggests that crypto is, quite possibly, a superior investment to gold in a period of market uncertainty. Does Buterin have a point?

Three arguments for crypto

Buterin broke down his argument into three succinct points. Two of these honestly don’t seem very convincing. Buterin suggested, for example, that gold does not support the same types of “secure storage options” available in the digital world. I don’t know about you, but gold seems pretty safe to me.

Image source: Getty Images.

Buterin also suggested that gold is “inconvenient” and “difficult to use” when doing business. This seems to be a better argument because just about everyone can agree that pressing a button on your phone to send crypto anywhere in the world is much easier than lugging around some gold bars to make a transaction. But that doesn’t mean crypto is a better investment than gold.

However, the third argument is what really got me. Buterin suggested that “gold has less adoption” than crypto. If you take a big macro picture of the situation, there are more people who own crypto than own physical gold, and that gives it a certain degree of security. About 145 million American adults say they own cryptocurrency or have invested in crypto in the past. This is 56% of the adult population in the United States.

Is crypto becoming more like gold?

The digital gold argument worked as long as it did because Bitcoin appeared to be uncorrelated with any other asset class, meaning its price did not move in the same way as other investments. But as we saw in 2022, Bitcoin is correlated, at least loosely, with the broader market. In other words, Bitcoin has the potential to go down when stocks go down. As a result, it lost some of its attraction for investors earlier this year.

But look at what’s happening in the financial markets right now when it comes to volatility. Just about everyone agrees that Bitcoin is less volatile than it has been. Some traders are even calling Bitcoin “boring” now. If lower volatility for Bitcoin is a long-term trend, that would make it a much more attractive investment, right?

Second, Bitcoin is now much more correlated with gold than it has been in a long time. The correlation between Bitcoin and gold is at its highest point in 40 days. Admittedly, this is a very small sample, but it suggests that traders around the world are trying to figure things out, and the relationship between asset classes can change.

The fight to become the world’s safe haven

At a time when many people are nervous about tech stocks and the market in general, is it really possible for crypto to become a safe haven? Will people who are worried about their money and savings really trust crypto over gold?

Note that Buterin did not say that “crypto is a better investment than gold.” What he said was that “crypto is the best option.” I don’t think he’s referring to a casino style bet here. Instead, he frames this in terms of game theory. Buterin got into crypto via the world of online multiplayer games, and in the past he has made arguments to suggest that he sees the financial markets as a similarly massive multiplayer game. This is a game where cooperation is key, but communication and trust may be non-existent. It requires knowledge of game theory to succeed.

Based on this, I think Buterin is really suggesting something along the lines of: Given that it is impossible to communicate directly with market participants around the world to find out what they are thinking, and given that the range of possible future outcomes is impossible. large, crypto appears to be emerging as the asset with the greatest likelihood of future success.

For now, gold is obviously a much safer investment than all but a handful of cryptos. But that’s where things get interesting, because cryptos like Bitcoin and Ethereum can emerge as potential safe havens for nervous investors. Investing in crypto is always risky and volatile, but if the relationship between asset classes continues to change, it may be worth considering whether now is the time to hedge your bets with some crypto.