Bitcoin Vs Gold: Which Is The Better Investment?

Bitcoin and gold are two very different investments, but both have become increasingly popular in recent years. Gold has been a trusted investment for centuries, recognised as a safe haven in times of economic crisis and a hedge against inflation. Bitcoin, on the other hand, is a decentralised digital currency that operates independently of central banks and is known for its volatility. While gold is a stable investment that can provide peace of mind, Bitcoin has the potential for large and quick returns. However, with the potential for huge rewards, comes the potential for huge losses. So, which is the better investment?

Bitcoin's finite supply

The finite supply of Bitcoin also has implications for its security. As a digital currency, Bitcoin is stored in secure wallets, and while these have been subject to hacking, it is also protected by blockchain technology and is free from the influence of any government or central authority.

Overall, Bitcoin's finite supply is one of its most attractive characteristics and is a key reason why it is considered a superior investment to gold.

Gold's stable investment history

Gold has been used as a store of value and a medium of exchange for thousands of years. Its utility has changed over the centuries, but it has always been an asset that holds value over long periods.

Gold's use as a store of value gained popularity in the 1970s when inflation ran rampant. During this time, gold rose from just under $300 an ounce to nearly $2,600, a monumental 700% increase, successfully preserving wealth and combating an eroding dollar. Gold's performance during this decade is likely the root of its reputation as a stable investment.

Gold has historically been used in many applications, including currency, luxury items, and specialized applications in dentistry, electronics, and more. This cross-functional utility has given gold the ability to maintain its value when other asset values fall.

Gold is also a safe-haven asset when the economy turns sour, and the prices of stocks and bonds decline. During the COVID-19 pandemic, gold's price skyrocketed from just under $1,300 in early 2019 to nearly $2,100 in mid-2020.

Gold's established system for trading, weighing, and tracking is pristine. It is very hard to steal or fake, highly regulated, and not subject to the same liquidity issues as newer assets like Bitcoin.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The more volatile an asset, the riskier it is to hold. Volatility also increases the cost of hedging, a major contributor to the price of merchant services.

Gold's limited liquidity

Gold's liquidity is limited in several ways. Firstly, gold's trading volume is relatively low compared to other major financial assets. In 2023, gold's average daily trading volume was approximately $163 billion, while the Dow Jones Industrial Average, for example, traded over $200 billion daily. This limited liquidity can make it challenging for investors to buy or sell large quantities of gold without significantly impacting its price.

Secondly, the gold market's liquidity is concentrated in specific regions and exchanges. The London bullion market, for instance, accounts for a significant portion of global gold trading. This concentration can create regional price discrepancies and affect the overall liquidity available to investors in other parts of the world.

Thirdly, the gold market's liquidity can be unevenly distributed across different gold products. Physical gold, such as bullion or coins, may have different liquidity characteristics than gold derivatives, such as futures contracts or exchange-traded funds (ETFs). Investors need to consider the specific type of gold investment when assessing its liquidity.

Finally, gold's liquidity can be influenced by economic and market conditions. During periods of financial stress or market turmoil, gold's liquidity may dry up as investors flock to safer assets. This reduced liquidity can make it challenging for investors to exit their gold positions without incurring significant losses.

In summary, while gold is a liquid asset with a large and global market, its liquidity has certain limitations that investors should consider when making investment decisions. These limitations can impact the ease and speed at which gold can be bought or sold, especially in times of economic uncertainty.

Bitcoin's regulatory risks

Bitcoin regulatory risks are an important consideration when weighing up an investment in Bitcoin versus gold.

Bitcoin is a relatively new asset, having been launched in 2008 or 2009, and its regulatory environment is still developing. The regulatory landscape varies across the world, from outright bans in some countries, to partial regulation, or no regulation at all. For example, some countries have prohibited registered financial institutions from engaging in cryptocurrency transactions, while others have barred its use as a means of payment.

The regulatory environment for Bitcoin is particularly important because it is a ""trustless" system, meaning it does not require trust from users in a third party. Bitcoin's value is based on its decentralised nature, and its ability to allow users to exchange things of value without the involvement of a central authority or trusted intermediaries like commercial banks. However, the reality is that a handful of miners and holders have a concentration of power in the Bitcoin network.

The regulatory risks for Bitcoin include:

• Market manipulation: The concentration of miners and owners creates opportunities for market manipulation that could hurt members of the public. For example, miners could influence the process by delaying or denying the verification of transactions.
• Lack of transparency: Mining operations are increasingly difficult and require vast computing power. Miners congregate in regions where electricity is cheap or accessible due to lax regulatory oversight, and these regions tend to produce electricity using fossil fuels. This lack of transparency has led to concerns about the environmental impact of Bitcoin and the potential for "dirty money".
• Illicit and illegal transactions: Bitcoin's anonymity makes it attractive for illicit and illegal transactions, such as money laundering, financing terrorism, collecting ransoms in hacks or cyberattacks, and buying or selling banned substances. While transactions can be traced, the pseudonymous nature of Bitcoin makes it challenging to regulate.
• Consumer protection: Consumers participating in crypto markets are exposed to considerable risk, including theft, volatility, and misinformation. Only a third of the countries studied by the Atlantic Council had rules in place to protect consumers, and many countries with crypto regulations are advanced economies, while low- and middle-income countries are slower to adopt crypto regulations.
• Financial stability: As crypto becomes more integrated with the core financial system, there are concerns about systemic risk and financial stability. Institutional investors have increased their stablecoin holdings, and some countries are seeing large retail holdings of crypto assets, primarily dollar-denominated stablecoins. This could lead to capital outflows, a loss of monetary sovereignty, and threats to financial stability.
• Lack of global coordination: Crypto is a cross-sector and cross-border phenomenon, and the lack of global coordination on regulation presents opportunities for regulatory arbitrage. Companies may issue new crypto-assets from jurisdictions with few or no guidelines and sell them to investors around the world.

To address these regulatory risks, policymakers and regulators are working on enhancing the regulatory framework for crypto assets. This includes measures such as licensing and registration requirements for crypto service providers, segregation of customer assets, transparency and disclosure requirements, and coordination between national regulatory authorities.

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