
Could Bitcoin become the investment asset of the future?
Could Bitcoin become the investment asset of the future?
The world economy is in a state of crisis. As a result, many investors are looking for an alternative place to invest their money into more traditional assets like gold. Could Bitcoin become the investment asset of the future?
Some are also turning to Bitcoin and other digital currencies as a hedge against inflation. However, these digital assets do not seem to correlate very well due to the fact that it trends in an almost parallel pattern to the stock market (up when its good and down when its not good). So will this new asset class (Bitcoin), ever carve out its own path and become the investors’ choice hedge against inflation in a turbulent market, or is it doomed to stay where it is?
In this blog post, we will explore the pros and cons of Bitcoin as an investment option compared to Gold and take a deeper look into the comparisons between the two.
Let’s start first by comparing these two assets by understanding what they both are and what they both do
Gold
Gold has been a safe haven asset for centuries. It is abundant enough to create coins, but rare enough so that not everyone can produce them. Gold doesn’t corrode, providing a sustainable store of value, and humans are physically and emotionally drawn to it. Societies and economies have placed value on gold for centuries, thus perpetuating its worth.
Bitcoin
Bitcoin is a decentralized digital currency, not subject to government or financial institution control, which means that is does not need to follow the same rules of economic intervention that fiat currencies do. the issuance of Bitcoin is limited in supply to 21 million units and its value is determined by market forces, similar to gold. It is incredibly volatile, however the returns over the past 10 year have outperformed any other asset class including Gold! Could Bitcoin become the investment asset of the future?
So with todays turbulent and uncertain global economics situation, which is a better investment Gold or Bitcoin?
Ultimately it will become a matter of personal choice, which of course will take consideration a number of key factors, such as your propensity for risk and the types of returns that you are looking to achieve, over what timescale. It would however be advisable to do your own researches and due diligence before you decide to invest in either of those assets and of course focus your research on a deeper look into the two different assets. So here are a few pointers to get us started:
A deeper look into Gold
Nearly every developed culture throughout history has used gold as a source of monetary exchange or a symbol of prosperity. We ascribe value to the Gold for several reasons:
- Scarcity – Gold is “scarce” in the sense that it is hard to find, and available in very low concentrations, which means that you have to process a large amount of rock to get it!
- Durability – gold does not corrode or tarnish, and cannot be destroyed
- Malleability – gold can be molded and shaped for different purposes which include industrial, monetary, and symbolic applications such as jewellery.
- Aesthetics – gold perpetually holds its brilliance, shine, and natural beauty which attracts our senses and makes it a desirable metal to own and display
- Usage – gold is an excellent conductor of electricity and can be used in high end connectors.
Modern investors are interested in gold’s unique characteristics as a portfolio diversifier and storage of wealth. Portfolios with a gold allocation have historically provided higher returns with less drawdown and lower risk. Gold also provides a strategic role in any portfolio by hedging against the market. The metal is often inversely correlated with equities, meaning it tends to perform well when the stock market is dropping. Gold also tends to perform well during periods of high inflation. For these reasons it is considered a good hedge in tough times.
A deeper look into Bitcoin
This new asset exists entirely in a digital world and has no physicality.
- Scarcity – Bitcoin is “scarce” in the sense that it is limited to 21 million coins and so when the last Bitcoin is finally mined in the year 2140, that will be it – there is no more !
- Durability – Bitcoin is digital and so it can not corrode or tarnish, and cannot be destroyed, unless there is some catastrophic event that destroys all computer technology and the Blockchain where it exists.
- Bitcoin is a Decentralized currency: Bitcoin has no central authority. The vast network of Bitcoin investors, users, and miners collectively control the supply and value of the currency.
- Bitcoin runs on the Blockchain: All Bitcoin transactions are recorded on a distributed ledger called a blockchain. The blockchain allows two parties to agree on a transaction and record it in an ever-expanding chain of chronological data points. The chain, separated by individual “blocks” of information, records every Bitcoin transaction. These transactions cannot be changed or edited. The distributed ledger is open source (publicly available), so anyone can investigate the code for themselves at any time. For this reason, Bitcoin transactions are not necessarily anonymous, although it is extremely difficult to link a certain line of code to a specific person.
- Bitcoin is a Peer-to-peer system: Usually an intermediary, such as a bank, must oversee financial transactions. The blockchain removes the need for such intermediaries and allows for true peer-to-peer exchanges. This means that you own your money, where it goes and can move it faster and with less costs
To learn more click here to view our Bitcoin Business Case study
Comparing Gold and Bitcoin
Gold and Bitcoin are both positioned to deliver superior returns, liquidity, and protection against fiat currencies. They both allow investors to “exit the system,” with an asset that the banks and government can’t touch. However, the assets differ in major ways. Could Bitcoin become the investment asset of the future?
Security:
- Gold: Investors have many options for securing their assets, which introduce certain risks and rewards in terms of security. They can store their gold in a depository or bank, a personal safe, or under their mattress.
- Bitcoin: Bitcoin has proven itself as one of the most secure cryptocurrencies. However, no technology is infallible. The crypto universe is notorious for fraudulent activity. If investors want complete protection against theft or loss, they must set up a cold wallet, which is disconnected from the internet. A cold wallet is not without risk as if you lose or forget your password of the hardware that your Bitcoin is deposited, then you could lose it!
Liquidity:
- Gold: When you want to sell your gold, there is always a buyer. Gold is one of the most frequently traded assets in the world, providing a very high level of liquidity and supporting the price. Of course, selling your gold can be difficult if you store it under your mattress.
- Bitcoin: Bitcoin is also a very liquid asset. The currency has a healthy population of buyers and sellers all over the world and change of ownership can be transacted very quickly, securely and at relatively little cost.
Longevity:
- Gold: A 5,000-year history of stable purchasing power proves that gold cannot be replaced by another metal. No other element shares gold’s unique characteristics. Even other monetary metals, such as silver, platinum, and palladium, serve very different industrial and investment purposes.
- Bitcoin: Bitcoin has been around long enough to prove the system works. However, Bitcoin investors must bank on the fact that Bitcoin will remain the top crypto and that the adoption levels will continue to grow. Technology never stops improving. Bitcoin does have a first-mover advantage and a huge population of loyal holders, but a competitor could theoretically replace Bitcoin although this does seem somewhat unlikely.
Volatility:
- Gold: Gold is revered for its low volatility. In fact, some economists argue that all prices should be measured against gold because gold is the most fundamental source of monetary value. The price can still rapidly rise and fall based on market demand, but over the long term, gold is a stable store of wealth. The price of gold has ranged from a low of $1388.25 in Sept 2018 to $2253.63 in July 2020
- Bitcoin: High volatility is a hallmark of Bitcoin: high risk, high reward. Some investors love high-risk assets. Bitcoin probably has much greater upside potential than gold, which comes with much greater downside potential. In comparison to Gold, over the past 10 years Bitcoin has ranged from $5.27 in Jan 2012 to an ATH of $69,045.00 on Nov 2021.
Conclusion
From the above, we could conclude that Gold and Bitcoin serve very different strategic roles in a portfolio. Gold is currently a more stable hedge against inflation where investors turn to a safe haven when things look unstable.
Bitcoin is different
Bitcoin, on the other hand, currently behaves like a high risk on investment asset. It can generate great returns and outperform all other investment assets when the economy is doing well. However it can crash when the economy struggles or negative events targeted to disrupt its evolution occur. (We have seen multiple cycles now where the highs and lows are both extreme, but also progressive, with higher highs and higher lows occurring as we move towards the next Bitcoin Halving event). For this reason, Bitcoin still tends to be correlated with the stock market and until it reaches mass adoption and can set its own path, it is likely that it will continue to follow the market and have a more unpredictable journey.
Bitcoin volatility
Eventually, Bitcoin price volatility will stabilize. When this happens, it is more likely to create a path of its onw as a store of value and behave more like a hedge against inflation.
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Good luck and see you back here again soon!
Jack
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