Bitcoin continues to be adopted by mainstream investors. Even analysts at Goldman Sachs cannot ignore Bitcoin’s ability to compete with gold as a store of value! Zach Pandl, co-head of global FX and EM strategy at Goldman Sachs, pointed to Bitcoin’s $700 billion market capitalization, about 20% of gold’s $2.6 trillion share of the “store of value” market, as the main reason why investors should consider Bitcoin.
If the price of Bitcoin hits $100,000, that will give it a 50% share compared to gold. Pandl feels bullish about Bitcoin’s prospects in 2022. It is not a surprise. Last year, Bitcoin hit $1 trillion in market value.
The rise of Bitcoin has caused many reluctant investors to start comparing gold vs. Bitcoin, forcing Wall Street analysts and executives to take the comparison seriously.
Why is Gold a Popular Investment?
Gold is popular as a hedge against downturns in the economy. Gold’s value negatively correlates with the stock market, so investors put some equity in gold to make sure they lose as little as possible if a recession hits.
We have used gold as a store of value for millennia. It has five key features that make it an excellent option for investors:
These five factors make gold a vital part of a diversified portfolio. It maintains its value over the long term, serving as a hedge against inflation and concerns over fiat currencies.
It is not an either-or scenario when looking at bitcoin versus gold as a store of value. Just two years ago, another analyst from Goldman Sachs said that gold and bitcoin could coexist as stores of value.
Since then, Bitcoin has shot up in value despite economic downturns. Bitcoin is no longer viewed as a risky speculative investment for short-term value.
Bitcoin benefits from several factors that allow it to compete with gold over the next ten years as a store of value. Here are the six key factors to consider:
Bitcoin launched in 2009. Since then, it has reached peaks at over $65,000 per coin. When COVID-19 rocked the economy, investors saw that Bitcoin’s value was not falling like stock prices were. This negative correlation caused institutional and mainstream investors to start buying in.
One advantage of Bitcoin is a finite number of coins will be minted. There is a cap of 21 million coins. The creators have built scarcity into the technology. As more investors become interested, the limited supply will drive up the price.
Like gold, Bitcoin is also difficult to steal and fake. Backed by blockchain technology, every transaction is validated on the Bitcoin network using cryptography. Transactions are generally irreversible, publicly available, and highly secure.
Because Bitcoin is decentralized and dispersed over a distributed network that keeps track of every transaction, one failed server will never cause an issue. There are tens of thousands of other nodes to pick up the slack.
Investors want to turn their assets quickly and cost-effectively into cash. Bitcoin, like most cryptocurrencies, is a very liquid asset.
There are many trusted exchanges for people to buy and sell Bitcoin, making it easier to liquidate. You can trade on these markets 24 hours a day, seven days a week.
As long as there are buyers on the exchange, you can liquify Bitcoin immediately at any time.
As an investor, putting all your equity in one asset is a risky proposition. Ideally, you have a diverse portfolio with weakly correlated or uncorrelated assets. It’s what has made gold so popular—if stocks plunge, but your gold is unaffected or rises in value, you can rest easier knowing that your portfolio is protected.
Bitcoin presents advantages as an asset that will diversify your portfolio. Since 2009, it has moved independently of other assets, like equities. This correlation has been steadfast in periods of stress on equity markets, when diversification is valuable.
More than simply a store of value, Bitcoin has other utility too. It can also be used as a means of exchange online and, increasingly, in the real world.
Bitcoin and cryptocurrency are emerging technologies that present exciting possibilities, especially as interest in decentralized finance grows. It also has the potential to be involved in nearly as many applications as gold.
Bitcoin is praised as an inflation hedge. Since the coin is separate from traditional currencies, it is not impacted by inflation rates and monetary policy. Unlike fiat currency, there is a fixed supply that protects its value.
Volatility: The Risk of Bitcoin
Over time, gold is a stable asset, with very few massive swings in value. On the other hand, Bitcoin is a more volatile asset, subject to drastic short-term swings. The benefit of the volatility is an increase in the possibility of return. However, as with any investment, there is the possibility of losing equity during a downturn.
Determining the better option between Bitcoin versus gold boils down to your investment goals. If you are comfortable speculating and have a higher risk tolerance, Bitcoin as a store of value may be a worthwhile addition to your portfolio.
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