We’ve all likely had some form of a dream where someone gives you a large sum of money and you can do whatever you want with it.
Some may dream of a long vacation, a boat, a new car or some other major purchase they’d love to make.
For the purpose of this, let’s think in terms of investing.
If someone gave you $100,000 and told you that the only thing you could buy was either gold or Bitcoin, which would you choose?
It’s not necessarily an easy question to answer and everyone’s situation and risk tolerance is of course different.
However, let’s lay out the case for gold and Bitcoin, and see what that tells us.
The Gold Standard
When looking at gold or Bitcoin, one has been used as currency for thousands of years while the other is a relatively new investment.
For decades, investing in gold has been the standard for those looking to guard against stock market downturns.
But before you invest in gold, it’s important to revisit the different drivers of gold price performance.
Per the World Gold Council:
- Currencies — The strength and weakness of the U.S. dollar and other currencies.
- Economic growth and market uncertainty — Things like inflation, interest rates, income growth, consumer confidence and tail risks all factor into the price of gold at any given time.
- Tactical flows — The positioning of derivatives and price momentum can have an impact on the price of gold.
- Additional supply and demand dynamics — Looking at things like mine production and idiosyncratic demand-side shocks can apply pressure to the price of gold.
For years now, gold has been considered a big portfolio diversifier because it protects against inflation and currency risk. It also helps mitigate losses in times of market volatility.
As you can see in the chart below, since 1970, the gold market has been strong. Most recently, the precious metal is approaching its all-time high.
One clear advantage when considering gold or bitcoin is history.
Even in 1933, when President Franklin Delano Roosevelt implemented prohibitions and rules to criminalize the possession of gold in the U.S., the precious metal stood the test of time.
The Rise … and Fall … and Rise Again of Bitcoin
While gold has been on a steady rise over the last 50 years, bitcoin has been on a considerably different track.
In the chart below, you can see that the cryptocurrency experienced a sharp rise in 2017, but fell back almost as quickly.
Since its retreat in 2018, Bitcoin has pared some of those losses but hasn’t yet reached its previous peak.
In terms of investing, the bouncing of Bitcoin speaks to its volatility. It means there is a greater risk for Bitcoin, but also the potential for greater reward.
Plus, one advantage Bitcoin has over gold is you know how much of it is out there. Because of that, there isn’t the risk of overproduction.
In fact, Bitcoin recently went through a halving — where the same amount of Bitcoin processed generates half the number of new bitcoins. This halving helps the system avoid inflation by making it more expensive to mine than it’s worth.
Gold or Bitcoin: The Takeaway
I get a little hesitant when it comes to Bitcoin, mainly because of the volatility.
That doesn’t mean you, as an investor, should back away. It just means you should be cautious.
Bitcoin isn’t going to dethrone gold as the standard-bearer for safe havens, but there is some value to holding some of the cryptocurrency in your portfolio … just not a ton of it. So think starting out with 1% of your total portfolio geared to Bitcoin.
For now, gold is still one of the strongest hedges against stock market volatility. It’s a position that it will hold for a while.
But having some crypto in your portfolio, along with gold, certainly doesn’t hurt and only works to help make you more diversified.
Editor’s note: Check out my conversation with Banyan Hill Publishing’s Ian King, where we discuss the myths and truths about cryptocurrency here:
