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Cryptocurrencies’ main competition is fiat currency, not gold. Yet, we are drawn to gold vs cryptocurrency comparisons for the reason of them being surprisingly alike. At their core, both are global assets with inherent scarcity. Thus, if the quantity is stable, we can be assured there won’t be rapid supply-led inflation — something our day-to-day fiat currency falls victim too.
Gold was also popular among some of those groups, as explained later. They do of course differ greatly in some respect too. Most notably, its volatility and growth potential, but also in the perspective of a business. Whilst shops do not accept gold for payment, there are a plethora of bitcoin casinos and bitcoin e-commerce stores.
Both gold and cryptocurrency are also liquid markets in which owners can exchange to cash very quickly, and at low costs. Both are also difficult to corrupt or make counterfeits of, albeit for entirely different reasons.
Cryptocurrency is capped at a supply of 21 million tokens, and remains decentralised away from government control. This makes cryptocurrency extremely popular amongst a whole host of people: free-market libertarians, a lot of private enterprise, conspiracy theorists, and potentially the banking industry.
The case for Cryptocurrency
Cryptocurrency is a relatively new phenomenon, and like most infant industries, there’s a tonne of room for growth. Bitcoin was the first mainstream coin, in which it exploded from under $1,000 in January 2017 to almost $20,000 by the end of the same year. This is more than you would expect with a stand-out tech firm during its public offering year.
Of course, there was a crash soon after. But, no one is suggesting that cryptocurrency defies the risk-reward relationship. What does capture investors imagination is the idea of another Bitcoin, which does look possible given the strength of many Alt coins. For example, Ripple, which is the third largest cryptocurrency, is in partnership with Forex behemoth MoneyGram, as they’re backing the currency to help mitigate friction for international transactions.
The true benefits of cryptocurrency are yet to be touched on. Gold may sound more useful in theory, but in practice, your local takeaway isn’t accepting it in exchange for goods. Whilst crypto is liquid, it hardly even matters — more and more businesses are accepting it as valid payment.
Cryptocurrency is very useful as a holding because transactions involve less wasted margin costs. For example, purchasing a good from abroad involves exchanging fiat currency from a Forex broker. Gold would also involve commission. However, Bitcoin is a global currency, making global payments safe, cheap and very fast.
The case for gold
The Gold Standard was named accordingly for a reason: gold has been consistent in its historic valuation, and its tangibility was a great way to backup the value of paper currency. Since moving away from the Gold Standard, fiat currencies, like cryptocurrencies, have no underlying value.
Gold can be used for many things, such as jewellery and is a material used for many objects. We can also guarantee the scarcity of gold, meaning that it won’t be suddenly inflated. You can make this same argument for cryptocurrency too, making it more of a case against fiat currency.
In the event of the USD weakening, such as the past 5 months against the Euro, you generally get a rise in the price of Gold. This is because Gold and the USD are negatively correlated. When there’s uncertainty over the world’s reserve currency (USD), investors turn to the second reserve currency — gold. Investors also like to hedge against stock volatility with gold. Unlike cryptocurrency, gold is globally recognized to be valuable, whereas many countries are resisting crypto, and has so many global transactions that its volatility is low.
This makes gold a great tool for portfolio diversification to offset the risks of other currencies. What doesn’t manifest, however, is rapid exponential growth, unlike with many cryptocurrencies — Bitcoin’s growth since 2012 is no match for gold. With less capacity for growth but less volatility, the decision between the two is wholly down to what a current portfolio is lacking, and the investors goals. Or rather, both should be held, but in different weightings. Even the most gold-laden, low-risk investor who is close to their retirement cash-out, there’s always a small portion of a portfolio that can be dedicated to crypto’s growth potential.
