Gold and bitcoin are powerful alternative assets. Neither is controlled by any governmental entity, both are in finite supply, provide inflation protection, and portfolio diversification. And while both assets are both having a very good year — the similarities stop there.
Gold is Something You Can Hold
Perhaps the main difference between gold and all cryptocurrencies is its tangibility. Yes, you can hold gold in your hand. It has girth and weight. You can put gold in your safe or in a strong box at the back of the closet. Gold’s physical nature makes it feel real, measurable and somehow more valuable — and this is verified by neuroscience, the human senses, and how we possess and own things.
According to Psychology Today,
“Physical products, unlike their digital counterparts, provide greater opportunities for psychological ownership. It’s human nature to become attached to physical things. Thus, when the physical product aligns with the consumer’s identity, it provides greater symbolic value and self-verification.”[1]
When it comes to acquiring gold, self-verification actually plays a big role. Gold is often considered to be the investment choice of the well-heeled and the wealthy. It is where high net worth individuals stash their savings and how savvy investors diversity their portfolios.
While it differs from bitcoin in terms of how we own and possess it, gold’s connotation with “old money,” generational wealth, and social class is quite unique.
Bitcoin Is Enjoying Outsized returns
Bitcoin is a virtual currency. It is a computer-generated payment network and a new form of money that utilizes blockchain technology. So, what does all of that mean? According to Coinbase, it’s simple:
“Bitcoin was created by Satoshi Nakamoto, a pseudonymous person or team who outlined the technology in a 2008 white paper. It’s an appealingly simple concept: bitcoin is digital money that allows for secure peer-to-peer transactions on the internet. Unlike services like Venmo and PayPal, which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized: any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government, or other institution.”[2]
So, what about this person Nakamoto? And who wrote this white paper? If it all sounds a little far-fetched to you, over 100 million people don’t agree. The market capitalization of bitcoin has reached over $2.3 trillion.
According to most media outlets, bitcoin is “on fire” and has hit over $113,500 BTC/USD. It’s enjoying a more than 21% year-to-date rally and is being driven by a host of factors including regulatory clarity, increasing acceptance, heavy ETF inflows, and plain old popularity.
The Critical Queston of Valuation
But there is perhaps no more important exercise for investors than the process of determining the value of a given asset. This entails examining market share, risk, supply/demand, sentiment, and future growth potential.
The valuation process helps investors make smart decisions, reduce portfolio risk, and optimize their savings and retirement holdings. According to one financial services company, assessing intrinsic value is critical to this process.
“Valuation is the process of determining the intrinsic worth of an asset, whether it be a stock, bond/sukuk, real estate property, or a business. This assessment is based on a combination of quantitative and qualitative factors, including financial performance, market conditions, industry trends, and future growth potential. By comparing an asset’s intrinsic value to its market price, investors can decide whether it is undervalued, overvalued, or fairly priced.”[3]
Gold’s intrinsic value stems from its rarity, durability, historical significance, industrial uses, jewelry applications, and its role as a monetary standard. It dates back thousands of years and was coveted by history’s wealthiest kings, pharaohs, empires and dynasties. Today, it is the strategic reserve asset of the world’s most affluent central banks and leading monetary authorities.
But where does bitcoin get its value? Like gold, it’s subject to supply and demand fluctuations as well as the impact of investor sentiment. But unlike gold, bitcoin is limited in its uses, is considered speculative, and lacks the rich cultural history of gold.
Fidelity recently outlined the bear and bull argument for bitcoin:
- The bear argument –Critics argue bitcoin is too volatile to be a reliable currency. Daily fluctuations of 5 percent are ordinary, not to mention occasional double-digit price moves. During its most recent bear market (from November 2021 to November 2022), it dropped nearly 80% from its all-time high. While it has since rallied back to make a new all-time high, bears argue the big fluctuations make it an unreliable asset.
- The bull argument – Bitcoin advocates say the volatilityis understandable because bitcoin is still in the early stages of adoption.[4]
The Heart of the Debate
So, when it comes to intrinsic value — gold and bitcoin have little in common. Gold is tangible and perceptible while bitcoin is digital and imperceivable. Gold is cloaked in history while bitcoin is shrouded in mystery. Some have called bitcoin “digital gold” but the very notion of something being digital, goes against the physical and tangible nature of something being gold.
According to the World Gold Council the demand for gold comes from many places while the demand for bitcoin is far less varied.
“Gold is different from almost every other asset because it is used in so many ways. Investors and central banks own gold to generate returns and protect their wealth. Jewelry is a major part of gold demand. Gold is also a key component of electronic devices, from cell phones to TV sets. As gold has multiple uses, its’ price can be more resilient than prices of many other assets … The demand for crypto currencies is largely limited to investment, as compared to gold, which is bought for many reasons. Some consumer research shows that investors are more likely to view cryptos as a high risk, high return, speculative bet compared with gold.”[5]
And in terms of investing and wealth protection, JP Morgan considers gold more risk-averse and a far better portfolio option than bitcoin, which they feel could actually undermine the resiliency of retirement and savings accounts.
“In our view, gold may be positioned to offer some protection against further geopolitical risk and dollar weakness. We are skeptical that Bitcoin and other crypto assets offer the potential to improve portfolio resilience. Despite their low correlations to traditional assets, crypto assets have historically made portfolios more fragile.”[6]
So, there you have it. Gold’s physical properties not only make it more attractive than bitcoin, its many uses and sources of demand make it a better hedge and a sounder investment.
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[1] https://www.psychologytoday.com/us/blog/mind-brain-and-value/202306/why-some-people-still-love-physical-products
[2] https://www.coinbase.com/learn/crypto-basics/what-is-bitcoin
[3] https://simplyethical.com/blog/the-importance-of-valuation-in-investment-decisions/
[4] https://www.fidelity.com/learning-center/trading-investing/investing-in-bitcoin
[5] https://www.reuters.com/plus/why-gold-is-a-very-different-investment-than-cryptocurrencies
[6] https://finance.yahoo.com/news/bitcoin-vs-gold-best-buy-071200841.html
