Exploring the Battle of Assets: Gold vs. Bitcoin

Gold and bitcoin have been pitted against each other. Within financial media, this has become an either-or debate about which asset is the better inflation hedge and potential solution for a scenario where the U.S. government debt causes a mass devaluation in the dollar. While gold has long been a go-to option during times of economic uncertainty, bitcoin, if you are able to hold it through its extreme bouts of volatility, has rewarded its investors over nearly all timeframes. Both are considered, by some, as hedges against volatility and inflation. In this insight, we will examine the case for and against both gold vs bitcoin and see if we can draw new conclusions.

Both gold and bitcoin have risen to prominence (re-risen in gold’s case) during the recent spell of high inflation and the gold vs bitcoin debate has followed. It has been proposed that they are both stores of value during periods of inflation.2 Gold's historical role as a hedge is linked to its historical use as a currency, its real-world production applications, and its relatively fixed supply. Conversely, bitcoin's appeal largely lies in its fixed supply (only 21 million coins have been mined), leading some investors to posit that it is immune from inflationary pressures imposed by central banks.3

Proponents of bitcoin, in the gold vs bitcoin debate, extol its decentralized nature, fixed supply, and blockchain technology, potentially positioning it as a new global currency that can be frictionlessly transferred from party to party, without storage costs inherent to traditional assets like gold. They envision bitcoin as the future of money, offering borderless transactions and protection against currency devaluation caused by central governments. Moreover, bitcoin investors reference new structural demand for the asset following the launch of several bitcoin ETFs.4

Raoul Paul, the CEO and Co-Founder of Real Vision, a financial markets-focused online publication, and a major bitcoin bull, cites the fact that, as of the beginning of May, bitcoin is one of the best-performing assets over nearly all standard timeframes. Further, Raoul counters arguments that bitcoin has no intrinsic value by asserting that narratives matter in financial markets. He says, "We’ve memed a trillion-dollar currency into existence. We’ve memed it. It’s just human narrative. But guess what? So’s gold. So is everything that we do, including religion. Everything is a meme. So memetics rule the entire way that humans understand the world around them.”5

Critics of bitcoin point to its volatility, regulatory and technological uncertainties, and lack of intrinsic value. There is no denying that the asset could be difficult to hold during its extreme drawdowns. That said, so far investors have been rewarded if they committed to it.

Bitcoin and digital currency asset class have had regulatory challenges and hurdles. Due to its suspected use in illegal black-market trading, and potential for fraud, the SEC and FINRA have been slow to approve crypto-related investment vehicles and the potential threat of regulatory action remains very real.7

Bitcoin’s digital nature renders it susceptible to becoming obsolete, raising more doubts about its long-term viability. While this is hard to price-in, it is worth considering that, like the birth of the internet, the viability of the idea behind bitcoin does not mean that bitcoin itself will be successful in the long-term.

Finally, bitcoin's correlation with risk-sensitive assets like stocks challenges its status as a haven asset.8 As shown by the chart below, it is hard to make the case that it is an inflation hedge like gold when it is clearly highly correlated with risk assets and low interest rates.

Supporters of gold, in the gold vs bitcoin debate, tout its millennia-long track record as a reliable store of value, underscoring its tangible nature and widespread acceptance in economies across the globe. Proponents of gold also cite the fact that it is not merely an investment asset, but rather has a functional purpose besides serving as a currency.9

This year alone, gold prices have surged by over 15%.9 Unlike the cryptocurrency market, gold boasts a tried and tested investment history, delivering returns rivaling those of the stock market over the past two decades.

It is a proven diversifier during times of dollar devaluation and, generally, has been an effective hedge during market drawdowns.

Similar to bitcoin, gold has also had the advantage of increased demand that may be here for the long term. For example, China has bolstered its gold reserves while reducing its holdings of U.S. debt. As of March, China had about $775 billion worth of U.S. debt, down from about $1.1 trillion in 202110, while its gold reserves are at their highest levels.11 China and other countries’ move away from US treasuries and towards gold may lead to more structural demand for gold in commodities markets.

Generally, the case against gold is predicated on the opportunity cost of investing in gold given other asset classes. When viewing longer-term time horizons and factoring in investment income, gold does not typically offer performance advantages versus the S&P 500.12

In the ongoing battle between gold vs bitcoin, it's evident that each asset has its unique strengths and weaknesses. While bitcoin offers unparalleled innovation and potential for growth, its volatility and regulatory uncertainties give pause to some investors. On the other hand, gold's stability and time-tested reliability make it a cornerstone of wealth preservation strategies. There may be room for both gold and bitcoin in a diversified investment portfolio, as they do act differently and provide meaningfully different return streams despite their recent correlation.

That said, if pushed to choose only one of these assets for hedging, we think gold is the better option, particularly because bitcoin is highly correlated with risk assets.

Fortunately, investors who partner with Crystal Capital Partners can outsource the decision of when and how to allocate to bitcoin and gold to established fund managers with expertise -- and sophisticated quantitative tools that have historically helped provide investors with high returns.

Sources:

1. https://www.forbes.com/sites/bobhaber/2020/12/14/the-great-gold-vs-bitcoin-debate-currency-debate/?sh=6c5b7344716e. See Also JM Preroll 30 (youtube.com)
2. Bitcoin as a Store of Value: A Comparison to Gold (crypto.com)
3. How Many Bitcoins are There and How Many are Left to Mine? (blockchain-council.org)
4. The rush of banking giants towards Bitcoin ETFs! (cointribune.com)
5. Bitcoin vs. Gold: The Debate Continues | Mises Institute
6. Gold Is Soaring While Bitcoin—and Everything Else—Is Slumping. Here’s Why. - Barron's (barrons.com)
7. Crypto and digital assets: Regulatory challenges (kpmg.com)
8. Gold Is Soaring While Bitcoin—and Everything Else—Is Slumping. Here’s Why. - Barron's (barrons.com)
9. Why gold is a very different investment than cryptocurrencies (reuters.com)
10. https://www.nytimes.com/2024/05/05/business/china-gold-price.html#:~:text=gold%2Dprice.html-,China%20Is%20Buying%20Gold%20Like%20There%27s%20No%20Tomorrow,metal%20at%20a%20record%20pace.
11. China Gold Reserves (tradingeconomics.com)
12. Investing in Gold Is Dumb | Kiplinger