1.2058699-1112536698
Bitcoin or Gold: Which is a better investment? Image Credit: Bloomberg

Dubai: What we saw during the pandemic is that people moved towards safe-haven assets and investments in gold have given good returns. However, taking the shine off the yellow metal, cryptocurrency has given even better returns than gold.

So, Bitcoin or gold – which is a better investment? For veteran investors and experienced traders, the two are very different markets to focus on; While Bitcoin is a digital currency, the precious metal gold is very much a tangible asset and has been highly valued for ages.

Stock Gold Dubai jewellery
What we saw during the pandemic is that people moved towards safe-haven assets and investments in gold have given good returns.

Considering the key differences between Bitcoin, one of the major cryptocurrencies, and gold, enables people to make informed investment decisions and capitalise on price movements. The main differences include volatility levels, storage procedure, and sources of demand.

There are similarities too, such as the scarcity of each – there can only be 21 million Bitcoins, while there are around 55,000 tons of the major commodity gold in the world yet to be discovered according to recent estimates.

Other factors, such as Bitcoin and gold’s utility as currency, are disputed. Here we’ll look in more depth at the key differences people should consider to be ready to trade in Bitcoin or gold.

ALSO READ

Stock Bitcoin
A crucial difference between Bitcoin and gold is the volatility of the two assets.

Bitcoin and Gold: Key differences

1. Volatility

A crucial difference between Bitcoin and gold is the volatility of the two assets. A useful measure of volatility is the average true range (ATR), which describes how much a market moves, on average, over a specified time.

The ATR for Bitcoin, expressed as a percentage of price, has historically been a lot higher when compared to gold and most of the time, Bitcoin tends to move further distances, creating more opportunities than gold.

Bitcoin vs Gold: Historical evidence of extreme volatility in Bitcoin and least volatility in gold
In 2017, Bitcoin’s volatility was demonstrated to exciting effect, rising from $1,151 (Dh4,227) to $19,783 (Dh72,666) between January and December.

It then plunged to $5,951 (Dh21,859) by February 2018, before rallying again to $11,537 (Dh42,377) over a matter of days, with more dramatic spikes to come over the year. Over the next 2-3 years, the price of Bitcoin catapulted.

Bitcoin was worth over $60,000 (Dh220,392) in both February 2021 as well as April 2021. This means outlooks on whether Bitcoin prices will fall or grow are difficult to measure, as movements from one large holders of Bitcoin already having a significant impact on this market.

Gold’s price has seen a much less volatile journey in recent years; In 2017, it’s interesting to note that there wasn’t a single trading day during the year when gold ended more than 2.5 per cent higher or lower than it had ended the previous day, an occurrence that hadn’t been seen since 1996.

According to data from Statista, from 2012 to 2018, the annual average gold price dropped from $1,668.98 (Dh6,126) per ounce to $1,268 (Dh4,657) per ounce, with a slight growth to approximately $1,400 per troy ounce in 2019.

In 2020 the figure rebounded to a record $1,769 (Dh6,497) per ounce, and has more or less stayed in the same price levels since, averaging at largely over the top end.
Stock gold jewellery Dubai
As a physical asset, gold is stored in vaults, safety deposit boxes in banks and personal safes for smaller amounts.

2. Storage Procedure

A second difference between Bitcoin and gold is the way they are stored. As a physical asset, gold is stored in vaults, safety deposit boxes in banks and personal safes for smaller amounts. Bitcoins, on the other hand, cannot be stored in the traditional sense.

Instead, what is stored is a secret number called a ‘private key’, which facilitates the transfer of Bitcoin from one party to another. Buying Bitcoin can be extremely risky if you do not make use of a hardware or software wallet to secure your private key.

There have already been a considerable number of hacks on Bitcoin exchanges that have resulted in millions of coins being stolen to date. Since 2011, $7.6 billion worth of cryptocurrencies have been stolen, according to a late 2020 report from Amsterdam-based analytics firm Crystal Blockchain.

Hacks can lead to a negative impact on the price of Bitcoin, but can also provide opportunities for short traders (explained below). This and other market events can be seen in the figure below, which highlights Bitcoin’s price sensitivity to market news and events relating to the cryptocurrency specifically.

Who are short traders?
Short selling is a form of stock trading in which a short trader bets a stock's price will drop. In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the asset rises.

ALSO READ

Stock - Bitcoin
The demand for Bitcoin is less clear and tends to centre on price speculation.

3. Sources of Demand

Gold, as an asset, has a 7,000-year history and its drivers of demand are easily identifiable (where it is consumed relatively higher than other places).

The demand for Bitcoin on the other hand, is less clear and tends to centre on price speculation (explained below), buy-to-hold trading strategies (explained below) taken into account by investors and the underlying block chain technology itself.

What are ‘price speculation’ and ‘buy-to-hold’ trading strategies?
Price speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage from fluctuations in the market. Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile.

Buy-to-hold or ‘buy and hold’, also called position trading, is an investment strategy whereby an investor buys financial assets, to hold them for a long time, with the goal of realising price appreciation, despite volatility.

In addition to having easily identifiable sources of demand, gold tends to exhibit seasonality in its trading. Sales tend to increase in January, February, July and August when viewing average returns over a five to ten-year timespan.

Recent gold prices have shown an increase in price in the first two months of the year to end off the Christmas and Chinese New Year periods. In China, gold is an integral part of Chinese New Year as locals use the precious metal to fashion zodiac symbols due to its investment value and aesthetic beauty.

The increase in price observed in July and August coincides with peak buying periods for jewellery, in particular, in India. This is because the country is one of the largest markets for gold as the commodity is widely regarded as a symbol of wealth, and plays a central part in weddings and religious rituals.

In addition to gold having easily identifiable sources of demand, it also presents the emergence of a pattern as to when that demand is likely to pick up throughout the year. By contrast, Bitcoin does not have such a well-defined source of demand and shows no indication of seasonality.

NAT STOCK GOLD 1-1590585082438
In addition to having easily identifiable sources of demand, gold tends to exhibit seasonality in its trading.

4. Bitcoin and Gold’s Utility as Currency

Bitcoin and gold’s utility as currency is the subject of some dispute. Economists often describe money as having three crucial functions that must all be satisfied: medium of exchange, unit of account and store of value.

Medium of Exchange: Medium of exchange is the ability for something to be used as a currency to exchange for goods and services. While not widely accepted, this description fits Bitcoin and only a few have accepted the cryptocurrency, with many more showing interest.

However, gold is not often used as a medium of exchange in modern economies and it is not generally considered legal tender.

Unit of Account: To satisfy the unit of account function, a potential currency must be ‘countable’ so that there is something to compare the cost of goods and services against. Unit of account is satisfied by Bitcoin due to the fact that the cryptocurrency is divisible. Most transactions will be fractions of a Bitcoin and these can go as far as eight decimal places.

Gold can also be used as a unit of account as it is also divisible (although less easily). Its value can be related to other goods through its value per ounce in a given currency.

Stock Bitcoin
Sceptics of Bitcoin argue that the cryptocurrency has no value and is merely worth what the next person is prepared to pay for it.

Store of Value: Store of value refers to an asset that can be set aside for future use. As it can be used in the future, it is believed to hold value overtime, as opposed to perishable goods such as milk, which is a poor store of value due to its propensity to spoil.

Sceptics of Bitcoin argue that the cryptocurrency has no value and is merely worth what the next person is prepared to pay for it. Some also believe that the fact that you cannot physically touch it is consequential when ascertaining its store of value.

In conclusion, it can be argued that while Bitcoin has been used as a medium of exchange, neither Bitcoin nor gold meet all three functions necessary to be considered ‘money’ and therefore neither fully satisfies a utility as currency.

Will Bitcoin ever replace gold?
Bitcoin and gold are very different assets. The cryptocurrency can’t replace gold as a precious physical asset as it isn’t a tangible commodity, while its volatility means it is unlikely to replace gold as a safe haven.

Final Verdict: Should I invest in gold or Bitcoin?

As we move toward a cashless society and digital currencies become more prevalent, it's reasonable to consider whether a new asset class like Bitcoin is worth investing in.

While several investors prefer to use Bitcoin as opposed to gold in their portfolio, it's also important to consider the proven merits of gold.

Because gold is more of a price-stable asset, you don't need to transact with it unless you decide to change your investment strategy. Bitcoin, on the other hand, may require a different investment approach.

Gold
Because gold is more of a price-stable asset, you don't need to transact with it unless you decide to change your investment strategy.

Since Bitcoin is a volatile asset, investors may want to have a market entry and exit strategy if the price fluctuations become a risk. In the case where the value of Bitcoin moves to your advantage, investors will also need to decide when and if to take some profits.

If you're wondering which asset to choose, gold or Bitcoin, most experts agree that it depends on your investment goals. The case for Bitcoin is speculative given that it doesn't have much utility yet.

For safety and wealth preservation, gold. For speculation, Bitcoin. Several experts also think it makes sense to buy both, and for an aggressive allocation they recommend a 50 per cent Bitcoin and 50 per cent gold.