Investing in Gold in the Crypto Age

By Ethan Tsvayberg

In the past year, Bitcoin took the financial world by storm, with its price surging from $6,000 to over $60,000.  Bitcoin is a cryptocurrency, a digital form of payment secured by cryptography and a decentralized network of  computers. Although many skeptics regard Bitcoin as a speculative investment, its recent success has  incentivized institutional investors such as JP Morgan to begin recommending Bitcoin to their clients. For many investors, cryptocurrency is an asset class worthy of consideration on account of its high historical returns.Yet  the big question remains: is cryptocurrency a safer investment than traditional asset classes such as gold? Gold and Bitcoin -also known as digital gold- provide their own advantages and disadvantages to investors.  

Why Invest in Bitcoin?  

Investors look into cryptocurrency for its upside. Many believe that cryptocurrency can replace traditional  currencies and completely take over the financial industry. Since cryptocurrencies have higher price  fluctuations, they tend to offer higher returns during a positive bout. Of course, this is not without a higher risk profile.  

Another advantage of a cryptocurrency future is its efficiency in financial markets. Cryptocurrencies could  remove intermediaries in financial transactions which would save time and costs. Bitcoin is electronic so it’s  easily transportable and transactions are made within milliseconds.  

Bitcoin holds many advantages in its attempt to become a valid currency. Today, businesses exchange Bitcoin  for various goods and services. For example, Tesla announced it would start accepting payments of Bitcoin for its products. Ultimately, cryptocurrencies would become viable currencies as more large companies start to use  them as a medium of exchange and unit of account.  

Why Invest in Gold?  

Gold’s advantage is its reliability and security. Gold is a tested currency that functions as a medium of  exchange, store of value, and unit of account. Bitcoin can be traded on markets, but its price fluctuations, or  volatility, fail to make it a legitimate currency. Gold has intrinsic value in technology and jewelry and the U.S  dollar is backed by the U.S. government, but Bitcoin has no inherent value or backing. Critics of Bitcoin argue  that Bitcoin is only bought because holders believe they can sell it for a higher price in the future. Essentially,  Bitcoin’s bull markets are positive feedback loops where buyers drive the price up, attracting more buyers, until the entire market crashes. Overall, gold can be trusted by investors with its low-risk history.  

In contrast to a fiat currency, such as the Dollar or Yen, gold is considered to be intrinsically valuable, which  has preserved its effectiveness as a focus for investors. Any currency with a store of value can be held for long periods of time without losing its value. As a metal, gold practically has an infinite shelf life so gold holders never have to worry about their currency deteriorating over time. A currency with a strong store of value provides citizens with a method of saving money for the future.  

Comparing the Two  

One concern for Bitcoin holders is government regulation, whereas gold holds no regulatory risk. Many  governments would not promote a cryptocurrency-based economy because they cannot regulate a decentralized  platform. For example, China banned bitcoin in 2017 to prevent unregulated and untraceable transactions.  Future legislation could limit or even outlaw cryptocurrencies as governments seek to control money supply and  currency flow.  

Despite this flaw, cryptocurrencies present expanded uses beyond that of traditional currencies. For instance, the main advantage of Bitcoin, one of the most popular cryptocurrencies, is its decentralization. Unlike the U.S.  dollar or precious metals, no authority can easily manipulate the price of Bitcoin. Another advantage Bitcoin  holds over gold is its inexpensive storage costs. Bitcoin can be cheaply stored in an offline wallet commonly known as cold storage. On the other hand, gold is a physical asset that carries costs to store and protect it. Even  Warren Buffett, a legendary investor, described gold as a weak asset because it “gets dug out of the ground in  Africa… Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It  has no utility. Anyone watching from Mars would be scratching their head.”  

Last but not least, gold is losing some of its functions as a currency while Bitcoin is accepted by more  businesses. Today, gold lacks the same functions it carried over 150 years ago. People do not exchange gold for  groceries in a supermarket or print financial sheets in terms of gold. Additionally, the recent price fluctuations in gold make the currency an unreliable store of value. Without these functions, gold can lose its value as a dependable currency.  

Citations  

Kotok, David. “KOTOK: Gold Has Just One Of The Three Characteristics Of A Functional Currency.”  Business Insider, Business Insider, 19 Apr. 2013, http://www.businessinsider.com/gold-is-not-money-2013-4.  

Kovach, Steve. “Tesla Buys $1.5 Billion in Bitcoin, Plans to Accept It as Payment.” CNBC, CNBC, 8 Feb.  2021, http://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html.  

Ossinger, Joanna. Bloomberg.com, Bloomberg, 25 Feb. 2021, http://www.bloomberg.com/news/articles/2021-02- 25/investors-could-add-up-to-1-of-bitcoin-to-mix-jpmorgan-says.  

“Why Bitcoin Is Not a Viable Currency Option.” KnowledgeWharton Fellows, 7 June 2018,  kw.wharton.upenn.edu/kwfellows/why-bitcoin-is-not-a-viable-currency-option/.  

Zhang, Laney. “China.” Regulation of Cryptocurrency, 1 June 2018,  

http://www.loc.gov/law/help/cryptocurrency/china.php.