Generally, people's relationship with the finances they earn, save, and spend is changing at a higher rate nowadays. While inflation is on the rise and most stores are not accepting cash payments, cryptocurrency is rising, with most countries having huge debts.
Nowadays, some banks are accepting cryptocurrencies as legal tenders, while others are launching their own digital currencies. Gold is an acceptable means of exchange and a store of value worldwide. And hence, most investors usually buy gold to maintain their monetary value whenever there is any financial crisis.
However, some people, on the other hand, believe that cryptocurrency is the modern currency, new gold, and modern investment. Let's dive into it.
Diversification
When the world financial system is facing crises, gold is usually the easy way for diversification. For instance, gold prices raised to $2,000 an ounce while Bitcoin remained reluctant during times of market stress.
In addition, cryptocurrencies have a high correlation between risking assets and increased volatility. This means that while cryptocurrencies have several positive fundamental values, they also have uncertain diversification benefits for investors.
In February-March 2020, the value of cryptocurrency decreased at a 40% same level as the US stock. This was a proper test of cryptocurrency as a gold alternative.
Inflation Protection
Generally, inflation is inevitable during financial crises. However, these are the times that gold shines. In contrast, cryptocurrency won't help you measure your purchasing power loss while gold will.
Additionally, although gold might not be the perfect inflation hedge, it helps investors boost their returns during inflation seasons. Most investors still think that gold has solid inflation hedges compared to crypto. Even with the inflation crisis in recent months, gold still heads, backing up to $1,900. On the other hand, cryptocurrency has a volatile, short trading history and no evident link with inflation.
Scarcity
Gold is generally scarce, and for this reason, its price is usually high, with an ounce costing about $1,590. Despite the great effort of gold mining companies, discovering massive mines is getting rare. And with most of the available mines being exhausted, the gold is a rare mineral but at the same time valuable.
With this fact, crypto has a chance to play its cards right. While the available Bitcoins are 21 million, new cryptocurrencies always appear in the market. Technically it might be possible to change Bitcoin rules in the future; hence, creating more. That is because producing cryptocurrency is an easier task than discovering new gold mines.
Environmental, Social, and Governance
Typically, gold mining is environmentally friendlier than Bitcoin, which uses considerable energy in its production. As a result, investors and consumers might stop using cryptocurrency once they discover its effect on the environment.
That is because most young investors tend to be more sensitive to climate issues. On the other hand, the gold trade might not need extraction since most of it has already been extracted.
Means of Exchange
Globally, gold has various applications, including jewelry and other industrial usages. Although gold is regarded as a legal tender, spending it in regular transactions like paying taxes or bills might be challenging.
For this reason, most gold ETFs are associated with physical assets instead of real things. This is the reason why most people with natural gold bars opt to preserve them in vaults for obvious reasons.
Conversely, cryptocurrency continuous to gain acceptance, though low. Due to the possibility of increasing in value, most people won't spend their cryptocurrencies on their purchases even though it is a means of exchange. The cryptocurrency volatility makes it a challenge for pricing items.
Volatility
Technical traders may benefit from cryptocurrency's strong price movement. However, this emasculates the argument of using it as an investment as well as a haven. Additionally, the primary beneficiaries of cryptocurrencies dealings are the crypto exchanges, as they get a share for every trade.
On the other hand, gold has traded within a range of $100 to $2,000 for over 50 years. Although the increase is not that exponential to make you rich overnight, it is a stable, decent long-term increase.
Bitcoin traded around $300 and $60,000 within six years; however, it had a sharp fall since its peak in April. Generally, Bitcoin's volatility requires careful considerations and experienced investors; hence, not suitable for everyone.
Best Both Worlds
Although gold seems to dominate the financial system, the two assets can co-exist in the future. Financial experts believe that stable coins might bridge asset class between the economic and digital currency status quo. Stable coins are digital assets linked to stable reserve value, such as gold or the US dollar.
For this reason, most central bankers are acting-wise to the opportunities and threats of digital currencies making haste moves into space. Additionally, the digital currency banknotes will be backed through the sterling value; hence, rendering them safe. However, it is essential to note that the digital banknotes stability will be ideal for cryptocurrency speculators.
Companies like Amazon, Google, and Facebook are some of the companies to watch in this territory. This is due to their existing technical infrastructure investments and a considerable number of users.
Currently, investors will continue purchasing cryptocurrencies and buying gold. However, in the future, a hybrid digital currency of the two might emerge. Additionally, it is essential to note that digital currency might be here to stay.
Conclusion
Generally, Bitcoin transactions involve no intermediate, which calls for extreme security. All transactions are usually reviewed by various participants who certify the transactions. Nevertheless, there have been cases of theft and fraud from the transactions.
In addition, when considering cryptocurrency, it would be wise to also reflect on the risk involved as there is a possibility of losing your investment. The absence of an intermediary makes it hard to recover the stranded or lost cryptocurrency.
Although there might be similarities between gold and cryptocurrency, there are also some differences. Gold has been a store of value for many years, while cryptocurrency has been in the space for several decades. Some of the similarities between the two assets are: demand and supply. They determine the market price, means of transaction, and store of value.
Additionally, this link might help you understand the main differences between the two assets beyond what is discussed in this article. For more information about cryptocurrency, be sure to contact us today.