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Bitcoin vs. Gold: How do both assets compare as a store of value right now?

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Bitcoin vs. Gold: How do both assets compare as a store of value right now?
Bitcoin vs. Gold: How do both assets compare as a store of value right now?

The Bitcoin community insists that the crypto asset is a digital version of gold. Just like the yellow metal, it can be used as a safe haven for wealth.

Several wealthy investors, institutions, celebrities and corporations have added bitcoin to their reserves.

But how does this innovative new digital asset compare to the world’s oldest and most popular store of value? Here’s a closer look.

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Track record

Gold obviously has a longer track record than its digital rival. While bitcoin was created 13 years ago, gold predates human civilization. The earliest record of gold being used for decoration dates back to 4000 BC. There’s a chance it was used for other purposes (perhaps barter) even prior to that.

Over those four millennia, gold has played a pivotal role in global politics and economics. In fact, most global currencies were pegged to the value of gold until 1971. Put simply, gold has had much more time to prove its status as a store of value.

But just because bitcoin is new doesn’t mean it’s less secure. The underlying blockchain has never been hacked, and the asset has certainly helped create more wealth than gold over the past 13 years.

Convenience

While gold has a wide head start, bitcoin is arguably more convenient to invest in.

Unlike physical gold, bitcoin can be stored online or on a software wallet. It can be moved across the world in a matter of minutes for minimal costs.

Currently, the average bitcoin transaction costs about $1.50 and is likely to be completed in about 10 minutes.

By comparison, physical gold needs to be stored securely, physically moved and protected around the clock — making it less convenient for the digital age.

Volatility

Although bitcoin is easier to store and transact with, it’s also much more volatile than gold.

According to portfolio optimization Bitcoin’s standard deviation — a measure of how much it can move beyond its average price in either direction — is 4.34. Compare that to gold’s standard deviation of just above one.

If you’re looking for a more stable asset, gold is clearly the better choice.

Correlation

Correlation is a key factor when measuring the riskiness of a particular asset.

If the price of a given asset moves independently from the economy or other traditional investments, adding that asset can significantly lower the risk of your overall portfolio.

Correlation coefficients range from -1.0 (a perfect negative correlation) to +1.0 (a perfect positive correlation). 0 shows no correlation at all.

Bitcoin’s correlation to U.S. stocks has reached as high as 0.66, so it’s not the best way to lower the risk profile of a traditional portfolio.

The gold-stock relationship changes over time depending on different economic conditions. But in times of extreme stock market volatility, gold prices have a low or even negative correlation with the S&P 500.

Central bank reserve assets

Gold is used as a reserve asset by central banks across the world — a key factor that makes it stand apart from Bitcoin.

Nations hold gold reserves as a safe haven, with countries like France, the United States and Germany each holding close to 80% of their total reserves in gold. This use as a reserve asset puts a theoretical floor on the value of gold.

Bitcoin is just beginning to gain acceptance from governments worldwide. El Salvador made bitcoin legal tender last year, and several other nations like Brazil and Mexico are considering the same.

Some governments are also thinking about the digital asset as a way to circumvent sanctions. Russia, for instance, is considering accepting bitcoin as payment for its oil and gas exports.

Distribution

Gold is naturally distributed across the world. Australia has the largest proven reserve of gold at 20% of global capacity. Meanwhile, gold that has already been mined is widely distributed among jewelry buyers, corporate buyers and central banks.

Until recently, the majority of bitcoin mining was done within China. But ever since China’s crackdown on crypto mining, the percentage of computer energy used in the process — the so-called 'hashrate' — is more widely distributed across the world. In fact, no country currently accounts for more than 35% of mining capacity.

Bitcoin that has already been mined is similarly well distributed.

The largest bitcoin holding belongs to the network’s anonymous founder Satoshi Nakamoto. Nakamoto holds 1 million bitcoin, which is about 4.7% of total supply. Public companies hold roughly 1%.

Culture

In some parts of the world, storing wealth in gold is deeply ingrained in local culture. For example, it’s an essential part of rituals and marriages in India, which is why Indian households are sitting on a $1.5 trillion hoard of gold.

Bitcoin is rapidly gaining cultural credibility, too. According to several surveys, roughly half of North American millennials said they would put a portion of their savings in bitcoin.

Crypto’s role in internet culture and meme investing is making it a bigger force in the global economy. Whether this cultural revolution displaces gold remains to be seen.

Bottom line

Gold is certainly more stable and time-tested than Bitcoin. However, Bitcoin’s drawbacks are quickly being resolved and younger investors are adopting it in greater numbers.

Over time, the world’s most popular cryptocurrency might actually fulfill its potential as digital gold.

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