Holding gold in your portfolio might be one way to invest to protect your purchasing power, but there is an alternative asset class that has taken off in popularity within recent years: cryptocurrency.
As institutional and retail investors alike pile into Bitcoin, you might be debating whether this new digital asset has a place in your investment portfolio or if you should stick with something traditional like gold. Here’s what you need to know about both assets:
- Gold as a safe-haven asset.
- Is Bitcoin the digital gold?
- Should you invest in gold or Bitcoin?
Gold, the Safe-Haven Asset
Gold has been around for centuries. People value gold because it’s a source of security that has been tested over time, while Bitcoin hasn’t been around during a major financial crisis like the Great Recession.
Gold is a well-regarded asset, widely used by investment professionals. “Central banks, major governmental institutions, pension funds and astute family offices will always have an allocation to gold,” says Edward Karr, founder at U.S. Gold Corp. (ticker: USAU).
Some investors like to think of gold as insurance for their money. If there is a concern about a nation’s currency, or if there’s an economic collapse, people usually flock to gold because it benefits in times of crisis.
“For gold, it has over 5,000 years of history on its side and isn’t going anywhere, which means it is super safe,” says John Carter, CEO and founder of Simpler Trading.
While gold prices have experienced volatility similar to stocks in the short term, over time, the precious metal’s value has remained stable. Since we’re living during a time with a lot of market volatility, it can make sense to have a portion of your portfolio allocated toward gold.
Gold prices can benefit from inflation, which makes it a great inflation hedge. When prices rise, the value of fiat currencies decreases and gold’s value rises because investors put their money into the precious metal to protect their purchasing power.
But since gold doesn’t pay interest or dividends, some may wonder if the commodity is worth the investment.
“Gold does not provide any sort of recurring income compared to other asset classes like real estate (income from rental properties) or stocks (income from dividends),” says Ricardo Pina, founder and CEO at The Modest Wallet.
There are other downsides to consider. “Costs of storing large quantities of the precious metal can be quite high, low liquidity creates large spreads and in some cases, it can be hard to verify the purity and legitimacy of the gold source,” Pina says.
While this may be seen as a disadvantage, “the point of gold isn’t income,” Carter says. “It is to preserve wealth during times of uncertainty.”
Ultimately, experts say if you’re looking for a safe-haven asset that is negatively correlated to other assets, gold has an important role in the stability of your portfolio as a “buy and hold” investment. It also acts as a diversifier, inflation hedge and capital preserver. All of these benefits can result in positive returns over time.
There are several ways to purchase gold. Investors have the option of buying physical gold bullion or gold coins, which usually have a higher barrier of entry, or you can purchase gold equities or exchange-traded funds.
Bitcoin, Digital Gold?
Unlike the stock market, which is open for trading during the week from 9:30 a.m. to 4 p.m. EST, the cryptocurrency markets allow users to trade Bitcoin and other digital assets 24 hours a day, seven days a week.
One of the key features of Bitcoin is that it has a fixed supply, which means there will only ever be a maximum of 21 million Bitcoins in circulation. Given the fixed volume of the asset, if there is continued demand for the cryptocurrency, the value of Bitcoin will theoretically increase – but there is still no guarantee for that.
“Similar to gold and other precious metals, Bitcoin derives much of its value from its limited supply and growing consumer demand,” says Edmund McCormack, founder and CEO at Dchained.
That said, the reality is that Bitcoin prices have experienced extreme volatility. Within the past month alone, Bitcoin’s price has fallen from nearly $60,000 in the beginning of May to about $32,000 in early June.
Furthermore, Bitcoin hasn’t been widely adopted yet, which has investors wondering what degree digital currencies will be accepted in the future. As a result, there is speculation about where Bitcoin’s price is going.
“Bitcoin has been a tremendous speculative asset and its long-term correlation to other portfolio asset classes still needs more time to work out due to Bitcoin’s high volatility,” Karr says, noting the cryptocurrency is an emerging asset class that’s only about 12 years old. Given Bitcoin’s short time in the market, the asset doesn’t have a long performance track record as gold does.
As a volatile and risky asset, Bitcoin’s massive price swings may be difficult for the everyday investor to take. This volatility stems from a range of events, from China’s crackdown on cryptocurrencies to Elon Musk’s tweets on the digital asset. Despite these setbacks, experts say Bitcoin could play an important role in your portfolio.
“Coupled with its low correlation against gold and the U.S. dollar, Bitcoin creates an opportunity to add further diversification and upside exposure in today’s market,” McCormack says.
Another popular feature of Bitcoin is the blockchain technology that powers it. This revolutionary technology is changing the way we transact with one another. Blockchain acts as an intermediary of monetary exchange between individuals, eliminating the middleman like banks and other financial institutions and empowering a decentralized market.
For investors intrigued by this new asset class, its decentralization and transformative technology, you can join crypto exchanges like Coinbase (COIN), Binance, Cash App and others to invest in Bitcoin.
Should You Invest in Gold or Bitcoin?
As we move toward a cashless society and digital currencies become more prevalent, it’s reasonable to consider whether a new asset class like Bitcoin is worth investing in.
“I’d personally prefer to use Bitcoin as opposed to gold in my portfolio as Bitcoin is truly decentralized, there is a finite supply and I can use Bitcoin to transact with anyone from anywhere in the world,” Pina says.
But it’s also important to consider the proven merits of gold. Because gold is more of a price-stable asset, you don’t need to transact with it unless you decide to change your investment strategy. Bitcoin, on the other hand, may require a different investment approach.
Since Bitcoin is a volatile asset, investors may want to have an entry and exit strategy if the price fluctuations become a risk. In the case where the value of Bitcoin moves to your advantage, investors will also need to decide when and if to take some profits.
If you’re wondering which asset to choose, gold or Bitcoin, Carter says it depends on your investment goals. The case for Bitcoin is speculative given that it doesn’t have much utility yet.
“For safety and wealth preservation, gold. For speculation, Bitcoin. I think it makes sense to buy both, and for an aggressive allocation I would go 50% Bitcoin and 50% gold,” Carter says.