Gold vs Bitcoin


Bitcoin, or as many like to call it, digital gold, has really managed to knock down all skeptics, hasn’t it ? It has now “survived” at least four notable bear markets during which mainsteam media was very quick to call it the end of the cryptocurrency. Yet, naysayers are yet again proved dead wrong and Gold supports while somewhat vindicated considering the rally of 2020, can’t be too happy with the lackluster performance of Gold when compared to cryptocurrencies or even S&P500. There are plenty of people on both side of the fence, but we do want to take a moment and explore some key ideas with regards of both assets and explain our views on both.

First of all, let us start by saying that we have been advocating for at least a 10% allocation in Gold since late 2018 when Gold was under $1300 and we were one of the first to identify the bottom in Bitcoin at the $3000 mark. It is fair to say we find both instruments valuable in this crazy MMT world but perhaps for different reasons.

Let’s be clear, Bitcoin is in a mania at the moment and we can almost be certain that when the mania ends for one reason or another, it could be draconic regulation, it could be nothing at all, we expect at least an 80% correction from the $3,000 lows posted in early 2020. However, we firmly believe that just like every bear market before us, it will be just that, a restart for the next bull-run. Let’s explore some of the extremely important, yet often forgotten qualities that make Bitcoin valuable:

  • Full control over your funds.
  • Ability to send money to anyone with a Bitcoin wallet that can’t be censored or blocked. While, this can be used by certain unwanted elements of society its benefit greatly outweight potential downside as in it’s core immutability is the best way to tackle bad actors & corruption.
  • Contrarily to popular belief it is perhaps the most transparent financial system out there. Each transaction is stored forever and can’t be manipulated.
  • Probably the most secure form of money. Cannot be confiscated.

All of the characteristics above are not present in Gold. Gold is very insecure from perspective it is very easy to confiscate as we have seen through various times in history happen, from conquering nations to governments. It is virtually impossible to easily transact in something like Gold coins as even if you could find willing buyers you would likely still need to verify authenticity, quality and other such things. A considerably bigger market and a lot more difficult to manipulate.

Here are some of the qualities that Gold shares with Bitcoin. They are both slow. They are both expensive to buy and mine. They have both proven, Gold considerably more so, to historically outperform currency devaluation.

What both Gold & Bitcoin are not – inflation hedge. The concept of Gold being a hedge for inflation has been around for centuries. However, when looking at the facts it has done a very poor job at doing that. Instead it is a lot more fair to say, Gold is a hedge against currency devaluation. We actually consider both Bitcoin and Gold absolutely superb in those qualities, but we find that due to their nature of causing literal “Gold rushes” it is extremely important to time the accumulation in either of those in periods of depression in their price, rather than during manias.

Is Gold still valuable and worth holding? Absolutely, and it might be even worth pointing out that buying investment gold in the form of coins or small bars is actually a good decision for a good retirement plan. However, it is absolutely normal that the new kid in the block with so much more potential will outperform the age-old Gold. That being said, this has a trade off, and that trade off is volatility and risk. Gold is considerably less risky and even in its worst bear markets it has rarely ever lost over 40% of its value after huge parabolic runs.

Is Bitcoin more valuable than Gold? We find that a fools question. They are both valuable but they each represent different risk and reward potential. Importantly, they both serve one specific purpose, which is to try to provide a safety-net against currency devaluation.

How does Bitcoin have value, it is not backed by anything? Our core argument on this has been one that is fairly easy to understand. In our day and age all of our lives are digital, as a matter of fact we would argue that that even 99% of the monetary supply is all digital. We spend our time on our phones & monitors starring at pixels. For many of us, our life, our job, it is all digital. Thus, ask yourself in a world that is almost entirely digital, does a currency not backed by anything make no sense? In the end of the day a lot of the properties of Bitcoin explained earlier are positive to society and even needed. Mind you, Milton Friedman himself predicted the coming of Bitcoin in an interview in 1999. Watch here :

What about Bitcoin’s value? How do we justify that? This is a fair question and honestly as this is literally a market that puts a price on the instrument completely based on what the other side of the market is wiling to pay it is a difficult and important question. However, there are some thing we do know about Bitcoin. It will always have a fixed supply of 21mln. We also know how competing markets such as Gold have a market value of roughly $7 trillion USD. If we assume both of these assets in their different ways serve a function to protect us against currency devaluation we can reasonably assume that at some point either % of the market of value in Gold will swap to Bitcoin or Bitcoin can at least reach the market value of Gold. At $7 trillion market cap, Bitcoin will be roughly valued at 385k per 1 bitcoin. This is not a price prediction, but we certainly view it as a possibility.

So what to do? As we have said we do and like owning both instruments in one’s portfolio. We believe the approach for either of those is reasonable risk management with the most important aspect being identifying a good entry point and taking profit along to way to make your initial investment “risk-less” from the profit you have taken.