Editor's Note: This story originally appeared on SmartAsset.com.
The COVID-19 recession may have gotten you thinking about how to preserve your wealth. Many investors consider assets like Bitcoin and gold as ways to preserve wealth.
Gold has thousands of years behind it as a universally recognized safe-haven commodity asset and inflation hedge. But the precious metal has been compared with a new asset, Bitcoin, along with other cryptocurrencies.
Over the last decade, Bitcoin has skyrocketed in price. Both assets promise benefits like diversification but come with their own drawbacks, too.
Let’s compare these options and see if either is right for you. Also, consider working with a financial adviser as you seek to make your portfolio recession-proof or inflation-proof.
Bitcoin Pros and Cons
The concept for Bitcoin was created as an electronic peer-to-peer cash system by an anonymous figure in 2008. Under the pseudonym Satoshi Nakamoto, this person (or group) described the system, which allows two parties to make transactions directly with each other without involving a third party.
Bitcoin’s popularity has grown because of several factors: It’s a portfolio diversifier like gold. It also has the potential to be a long-term store of value with a fixed supply that helps protect its value, unlike fiat currencies, which are government-issued currencies not backed by a physical commodity and controlled by central banks.
The fascination with the cryptocurrency has led to a number of strong supporters. Those confident in the asset believe its price increases are just the tip of the iceberg.
Figures such as Galaxy Digital CEO Mike Novogratz project the investment to overtake gold’s market capitalization, which currently sits at over $11 trillion, within just a few years. Some even call it “digital gold.”
However, the socially responsible investing (SRI) movement criticizes Bitcoin because mining the digital currency consumes massive amounts of energy. One consequence of that is that an initial supporter of Bitcoin, Tesla, recently dropped its acceptance of the cryptocurrency. When CEO Elon Musk cited the environmental cost of mining as the reason for the suspension, Bitcoin’s price took a nosedive.
There are also concerns regarding the safety of trading in digital currency due to the potential for security breaches.
Gold Pros and Cons
Gold has been regarded as an exceptional store of value for a long time. Moreover, it’s a tangible asset people can easily pass down through the generations. The culture around gold is one of its benefits. It’s a mainstream asset that’s accessible to traders of all backgrounds in various economic situations. So, even if retail investors don’t understand cryptocurrencies, they can buy gold.
And individuals aren’t the only ones who put faith in gold. Central banks also rely on its value to help create economic stability and growth. The U.S. itself used the gold standard up until the 1970s – which some investors argue was a safer option due to the volatility of current currencies.
Others, such as the CEO and founder of Goldex, Sylvia Carrasco, also feel this reliability and longevity may outlast cryptocurrencies. Carrasco points out that several cryptocurrencies have been banned, and Bitcoin may share the same fate.
But that doesn’t mean gold’s value is always the same. Its price has fluctuated over the years, and it doesn’t generate current income the way other investments can.
Gold also has an environmental impact. All mining operations pose possible risks, including water pollution, toxic emissions and decreases in biodiversity. Gold mining also has a history linked to human rights abuses and funding armed conflicts.
Bitcoin Versus Gold: Comparing the Two Options
Gold has the trust of many investors. Although Bitcoin doesn’t have age on its side, its soaring popularity reflects genuine investor interest. So, let’s compare what they can offer to you.
Both Bitcoin and gold come in shorter supply than other assets
Right now, there are only 18.79 million bitcoins in circulation, but that will eventually hit a cap of 21 million. Gold is also finite, just like many other natural resources. The law of supply and demand augurs higher prices for both.
Safety and transparency
Gold comes with fewer risks than some other investments. The current system in place to trade it is relatively strong, and it’s hard to corrupt the asset. Bitcoin traders are also safe from corruption due to its encryptions, lack of a central system and complex algorithms. However, there are some safety concerns. Simple mistakes can be disastrous, and instances like the Mt. Gox Demise have resulted in major losses.
The two assets share the same hallmark of high liquidity
Gold is generally considered one of the most liquid assets; there is always a reliable population of sellers and buyers waiting. So, you can convert it to cash without losing a significant amount in the process. Likewise, Bitcoin has great liquidity most of the time.
Gold is not as volatile as Bitcoin
Bitcoin’s price can fluctuate violently, which is the norm for cryptocurrencies. The rarity and lack of a central authority contribute to this as well as popular culture. Both political and social trends influence the cryptocurrency to a higher degree than gold, making the latter the more reliable option. As an example, Bitcoin’s price grew from below $1,000 in 2017 to over $19,000, only to drop back down to $8,000 by mid-2018.
Gold has several practical uses, from jewelry to dentistry to electronic manufacturing. It doesn’t tarnish either and transports easily. Bitcoin has contributed to real-world applications of blockchain technology. It also supports a global population that lacks access to traditional financing methods or banking.
Bitcoin Versus Gold: Which One Is Right For You?
Diversifying a portfolio can help mitigate risk and potential loss. Most investors incorporate this tactic into their investment strategy in some way; many argue Bitcoin and gold can help. Bitcoin is considered a non-correlated asset, meaning it’s not directly tied to the stock market. So, a small allocation to Bitcoin in a traditional account has the potential to improve returns without a significant increase in overall volatility.
Gold can also protect your finances through diversification. It can also help you hedge against inflation or a financial crisis since it tends to move opposite of the dollar. Investors who want added security would be better suited to this option.
By comparison, Bitcoin is the riskier choice overall. It’s decentralized and unstable, which can lead to significant losses. While many investors want to be on the cutting-edge of technology, only those willing to accept the potential costs of cryptocurrency should consider adding it to their portfolio. Gold also comes with some risk, but it has a longer history, making it easier for investors to time their purchase or sale, thus protecting them.
However, any investor interested in Bitcoin should know changes come every day. One of the asset’s greatest strengths is its global reach, but limitations may grow. As an example, China recently banned Bitcoin mining. This move may set the table for further legislation and regulation in other countries as well.
The Bottom Line
Gold and Bitcoin each have a role in the marketplace. Each one comes with its pros and cons that will appeal to certain types of investors.
Bitcoin promises potentially high returns and diversification, but at the cost of security. Gold ensures more risk management when you add it to your portfolio since it’s regulated, but less promise on returns. In addition, both choices come with ethical concerns.
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