BTC and Gold: Portfolio Management, Diversifiers, and Store of Value
Here’s the question: how does bitcoin compare with gold in portfolio management, and which is a more reliable “store of value”?
A store of value is an asset that can be saved, retrieved, or exchanged, while likewise possessing a predictable value at a later point in time. In more general terms, it’s an asset that should maintain its purchasing power far into the future.
Some investors favor gold for this; some favor bitcoin. Others keep both of these assets in their portfolio allocations. While these two assets differently in investment portfolios, they also share a number of similarities.
Gold has proven itself through history as a reliable store of value, but what about bitcoin? How does it stack up versus gold? Let’s dive in now and make a case for why investors might include one or the other, or both, in an investment portfolio; and which is the stronger store of value.
Characteristics of bitcoin and gold
Let’s start with the basics. Both bitcoin and gold are believed to be in limited supply. Both are mined — gold is mined physically, and bitcoin virtually.
Neither gold nor bitcoin generate income. Nonetheless, investors often include both in an investment portfolio to hedge investors against depreciating fiat currencies. When comparing the two in regards to store of value, however, gold might be the superior option for a number of reasons.
These reasons become evident when you compare the properties of both assets, and through examination of their history and stability.
Gold is tangible and transportable. It is also a highly liquid asset. You can buy or sell it anonymously. The properties that distinguish gold from other precious metals are in its rarity, durability, and fungibility.
It’s also divisible, malleable, and easy to hide and store. You can break it down or mold it into smaller and smaller parts, lock it in a safe or hide it just about anywhere. While there is the threat of theft, gold cannot be stolen by hackers, unlike bitcoin.
Bitcoin, on the other hand, is digital and not tangible. Because of this property, it can be sent across the globe near-instantly. This makes a case for bitcoin as a means of payment, without much difficulty or expense. Like gold, you can buy or sell bitcoin anonymously.
The nature of the blockchain allows for bitcoin to be purchased or sold worldwide in a decentralized manner. With the need for intermediaries eliminated, bitcoin can be sent globally much easier than gold.
Like gold, bitcoin shares properties of fungibility and divisibility. One bitcoin is equal to one bitcoin. Each bitcoin can be divided down to 8 decimal places, with the smallest amount that can be handled in a transaction at 0.00000001 BTC (one “satoshi”).
Holding bitcoin comes with certain risks that you do not have with gold. For one, if you lose your private key or somebody steals it, you can lose your bitcoin. Along these lines, there are likewise hacking risks that come with bitcoin ownership.
The limited supply of gold supports its position as a store of value. Every year, the amount of gold worldwide typically increases by 1.5%. Its unique properties, listed above, make it a great store of value when compared to other precious metals — more so than silver, palladium, or platinum.
While futures markets for gold do exist, increasing the supply of “paper” gold, these futures can be settled with real gold. This limits the influence on price creation from futures markets over the long term.
Comparatively, bitcoin also has a limited supply, at least in theory. Discontented Bitcoin developers could, however, potentially “fork” the network. A fork, at its most extreme point, can permanently split the currency in two. This is what happened with the Bitcoin Cash hard fork, Bitcoin Gold, or the most recent Bitcoin ABC and Bitcoin SV fork.
Beyond forks and returning to bitcoin as a store of value, another threat to bitcoin’s value is the 1000s of other cryptocurrencies on the market, any of which could eventually outperform their predecessor and potentially supplant bitcoin in investors’ portfolios. Unlike gold, bitcoin hasn’t had 1000s of years of competition against other commodity currencies.
Finally, there’s also a cash-settled futures market for bitcoin. This means that participants in the futures markets have the ability to create a limitless supply of “fiat bitcoin”, thus reducing bitcoin’s effectiveness as a store of value.
Comparing history and price stability
Historically, gold has maintained steady and constant purchasing power over a much longer period of time than bitcoin.
Gold’s future value is, for the most part, very predictable. Unless we find a new source for gold, this purchasing power is unlikely to experience any significant changes in the future.
Bitcoin investors, on the other hand, invest more so in technological disruption, hoping that bitcoin will significantly alter the way businesses or entire industries operate. Many of these investors are chasing tremendous profits, expecting bitcoin will supersede and possibly even replace gold and the US dollar as the world’s leading monetary asset.
Couple that with bitcoin’s historic price volatility, and you have a sound case for speculating on bitcoin. It’s a much more speculative asset, and while it can potentially make a great long-term investment, bitcoin’s unpredictability does not give justification for it as a store of value.
It’s important to note that central banks and governments still possess gold. They do this in order to reduce their reliance on the US dollar as a reserve asset. Moreover, note that central banks and governments do not own bitcoin, or any other crypto assets for that matter.
Bitcoin is completely decentralized (in theory… in practice its deflationary nature creates economies of scale and large portions of the network are controlled by a small group of actors. It is believed that most of these are non-state actors, at least for now), and it does not require any intermediaries to control transactions or the currency itself. Ask yourself, why would the central banks and governments the world over adopt a currency they cannot directly control? The answer: they wouldn’t; and they likely never will.
While bitcoin is a better means of payment than gold, gold is definitely the superior store of value for investment portfolios. The fact that, historically, the price of bitcoin has been not only volatile but likewise unpredictable, does not make a case for bitcoin as a reliable store of value.
Given, bitcoin does deserve credit when it comes to its value as an alternative asset for diversified investment portfolios. When investing in bitcoin or any crypto asset, however, it’s important to follow the golden rule of trading — only invest what you can afford to lose.
Crypto assets remain a hyper-volatile asset class. Their price is largely dependent on speculation, as well as real-world use cases and adoption. The potential to generate high gains that can be spread across your entire portfolio is there, unlike with gold. But bitcoin’s price is still influenced by too many variables to accurately predict its future value.
If you’re looking for a store of value in your portfolio, gold remains the more stable and predictable option of the two. Bitcoin, on the other hand, is more suitable as a diversifier in a well-balanced portfolio, a speculative investment, or, outside of the investment realm, as a means of payment.
Guest Post Written by Ben Lakoff, CFA, at Alt Asset Allocation, working to help open investors’ eyes to global investments beyond what’s offered by traditional brokers, like stocks and bonds. We exist to educate and present investment options for the forward-thinking everyday investor.