Cryptocurrencies and bitcoin have grown extremely popular as an investment and people consider them digital gold for a reason. Around the world, merchants are starting to accept this digital currency as a payment method. People realised its potential regarding preserving value, comparable to gold, especially during periods of downturn.
However, compared to gold which has always been a safe, stable investment and hedge against inflation, people still wonder how bitcoin will perform.
As with any investment, it’s essential to weigh the pros and cons of what you’re looking into and understand what trade-offs you should consider before taking the plunge.
What are the key differences between gold and bitcoin?
Bitcoin is considered “digital gold” but it’s very different from actual gold investment in age and context. It was created in 2008 with the goal of having a currency that is independent from any government or bank, with the aim to bring currency away from the conventional troubles and influence of traditional institutions, responding to the effects of over-centralisation.
The idea seemed unrealistic at first, but history has shown us it’s possible. Bitcoin was worth hardly anything in its earliest stages, but interest in the currency grew when it matched the dollar on a 1:1 ratio in 2011.
That aspect is one major difference between bitcoin and gold. Since bitcoin is younger, it still has a lot to prove–unlike gold which has been a safe haven investment for a long time. Gold has withstood the test of time, reliably holding its value during wars and economic downturns. In modern times, gold thrives even when the rest of the world is struggling.
Apart from that, gold is glaringly different because it has a tangible counterpart. This means it has intrinsic value, so it’s a reliable asset in times of economic turmoil. No matter how much it may be, you can rely on gold to have value–because it is still gold at the end of the day.
Bitcoin has played this role in the past, but given its intangibility, in recent years the cryptocurrency’s valuation has behaved much like the stock market.
Potential risks of investing in gold and bitcoin
Both gold and bitcoin have corresponding risks to take note of, but it’s a matter of understanding what these are and what you’re comfortable with before you invest.
Risks of investing in bitcoin
1. More volatile
Bitcoin is subject to the media effect, or how stories that the news or media publishes influence and/or amplify current price trends. Investor sentiment, regulatory action and hype play a role in the cryptocurrency’s valuation.
News from the digital currency or the finance reporting sphere can bring investors to panic and act decisively right away, promptly sending bitcoin’s price up or down. The cryptocurrency can experience extreme and unprecedented highs and lows in a span of hours.
2. Doesn’t perform as well in equity markets
Bitcoin has been traded like a stock for several years on cryptocurrency exchanges by early adopters, and has been treated like a stock by traders and investors.
The hazard of treating bitcoin like a stock essentially makes it vulnerable to everything that the equity market is affected by, with the exception of technological development changes:
- Investor sentiments
- Economic conditions
- Monetary policy
- Regulatory changes
3. Not seen as a safe haven
When trading bitcoin bears little difference in conditions to trading stocks, its function as a possible hedge against economic downturn is out of the question.
Safe haven investments are assets that one can turn to when the market is down, because they’re expected to retain or even increase value despite economic turmoil.
Bitcoin is intangible and is volatile by nature, so you can’t expect it to have the same or more value at the end of a trading day. It’s classified as a high-risk investment for this reason.
4. Governments are cracking down on cryptocurrency more
It’s a challenge for administrations around the world to sort out what bitcoin is, legislatively–is it a security, commodity or a property? Globally governments decided to suppress cryptocurrency industries in their countries.
China all but shuttered its cryptocurrency sector, closing energy-intensive crypto mines and ordering major banks and payment firms like Alipay to stop transacting with crypto companies.
The global crypto crackdown is just as widespread in the UK, where leading digital currency exchange Binance was banned from conducting regulated activities.
Risks of investing in gold
As opposed to other assets, gold tends to be less volatile because of the tangible asset its value is grounded in, but you still need to educate yourself about investing in gold before you do it.
1. Potential storage issues
If you’re buying physical gold, storage could present additional costs on top of your initial investment. If you keep jewellery, bullion or coins in a bank safety deposit box it isn’t as accessible as having your own home safe. In case of an emergency, you’ll have to rush to the bank to retrieve it.
2. International markets tend to set prices
Gold prices are subject to change relative to the international market. Major fluctuations around the globe affect local buying rates. Additionally, the value of the US dollar plays a role in determining how gold prices will change.
3. Sometimes gold has liquidity issues
Since gold’s value tends to be consistent, some investors will hold on to their asset for longer than necessary and its use as support during periods of economic turmoil.
Benefits of investing in gold and bitcoin
Benefits of investing in bitcoin
1. Offers plenty of user autonomy
Bitcoin, ideally, promises more user autonomy because the price is not linked to specific government policies. Users and owners of this cryptocurrency are effectively in control of their money, instead of vulnerable to bank runs and crashes.
2. No banking fees and little regulation
Bitcoin is decentralised unlike traditional financial exchanges, so users are not subject to the array of banking fees associated with fiat currencies. Users don’t worry about account maintenance, minimum balance fees, overdraft charges, and returned deposit fees, among other charges.
3. Lower international transaction fees
Bitcoin exchanges don’t involve intermediary institutions or government, so costs of transacting are generally lower compared to those for bank transfers.
4. Convenient and mobile
Bitcoin is a form of online payment, so users can pay for their coins anywhere that they have an Internet connection. Users do not have to travel to a bank or a store to buy a product.
Benefits of investing in gold
In a different manner to bitcoin, gold is an investment option that’s smarter and more rewarding in the long run with its own benefits to take note of.
1. Stable, even amidst inflation
In every major period of high inflation, the purchasing power of gold has soared, going in the opposite direction of paper currency that is reliant on market supply and demand for its value.
Gold goes further; when the general price levels of a country plummet in a period of deflation, it’s a solid investment option to diversify your portfolio and reduce your wealth volatility.
2. Symbol of geopolitical stability, even during crises
Gold retains value in the face of political instability. In 2011, gold soared due to rising inflation, debt, the US dollar, and unrest in the Middle East while the world experienced a financial crisis. Recently, at the peak of the COVID-19 pandemic, global investment in gold increased.
3. Unlike paper currency, gold doesn’t rely on the market for value
Gold retains its own value and appreciates over time–this means it’s an investment that isn’t at the mercy of how the money market moves. In general gold moves in the opposite direction of the market, so users can effectively offset and hedge from the volatility of their other investments.
4. Appreciates value over time
Gold is one way to conserve wealth across generations since it retains and appreciates value. Between holding an ounce of gold or dollars, you’ll be losing money if you hold onto the dollars as opposed to the one ounce of gold because the value of gold increased, while the value of a dollar was worn away by inflation.
Gold and bitcoin are both assets made more attractive by their scarcity, therefore it’s something many investors find desirable.
However, gold’s inherent value, combined with how people still perceive it as unattainable, makes it an investment option that will grow your wealth and diversify your portfolio. Gold is something to fall back on in the event every other asset goes sideways.
Nauggets are experts when it comes to providing you with options around how you can successfully acquire gold. Make the most out of your gold with our smart fintech app, the most convenient and easy way to trade gold.
If you are ready to learn more about what you can do with gold and how to get started with as little as $10, get in touch with us today.