This investor in both gold and bitcoin says only one offers real long-term safety
Both can be islands of security in an ocean of financial turbulence
Spoiler alert: I own both gold and Bitcoin in my portfolio.
As a longtime participant and observer of the shifting currents of monetary policy and financial markets, I believe both can play vital roles as repositories of value, especially in a world plagued by economic and political uncertainty.
But although they share some similarities, there are important differences that persuade me that contrary to growing opinion, bitcoin BTCUSD, 0.85% will not supplant gold GC00, 0.01% as the choice of investors seeking long-term safety.
Admittedly, bitcoin advocates have some momentum on their side, as its price hit a record above $40,500 in early January. After a recent pullback, bitcoin still trades around $30,000. Prominent institutional investors have become bitcoin fans; BlackRock, the world’s largest money manager, called it “a durable mechanism that could take the place of gold to a large extent.”
Yet, to paraphrase Mark Twain, “the reports of gold’s demise have been greatly exaggerated.” Bitcoin is certainly a legitimate asset and has the potential to be a true “store of value” — joining a select group of assets, commodities and currencies that can be saved, retrieved and exchanged without deteriorating in value.
However, gold has at least a 2,500-year head start as a widely-accepted, global medium of exchange and value. Compared to bitcoin, the gold market enjoys great depth and liquidity. The total amount of physical gold held by investors and central banks is an estimated $3.7 trillion. That’s nearly seven times the market capitalization of all bitcoin created. Both gold and bitcoin enjoy highly liquid markets, but gold’s average daily volume in 2020 was $125.3 billion, or 30 times bitcoin’s daily “spot” volume of $4.1 billion.
I own gold for insurance to offset the effects of inflation and as a safe haven to offset any steep losses in other parts of my portfolio. Bitcoin’s role in my portfolio is that of a speculative asset, rather than to protect wealth. I became interested while I was director of the U.S. Mint and wanted to understand cryptocurrencies, and the best way was to try it. Since leaving government service, I have become an investor in bitcoin.
Similar but different islands of financial security
While both gold and bitcoin can be seen as islands of security in an ocean of financial turbulence, we must understand their similarities and significant differences.
In both cases, their value is supported, in part, by scarcity. Gold is limited by physical supply and the difficulty of extraction, while bitcoin creation is capped at 21 million by its source code. These qualities, as well as the deep, liquid markets I noted earlier, mean that both gold and bitcoin have the potential to retain value, and in fact appreciate, during difficult economic cycles.
And unlike government-made currencies like the U.S. dollar, whose value derived from confidence in the issuing government and laws requiring citizens to accept it, gold and bitcoin have other uses, and the markets generally determine their value.