Gold is an asset that has acted as a safe haven throughout history. Not for nothing the Central Banks accumulate it. In addition, it has various uses in the real economy.
Gold does not pay any interest, so its value is always compared to the alternative of placing the money at interest. Therefore, if interest rates in the world are low, gold becomes attractive. But if rates go up, gold is hurt as it competes with interest on a bond or term.
For its part, bitcoin is the main cryptocurrency, a pioneer in block technology, known as blockchain. It is not issued by any central bank and allows transactions to be carried out without the need for intermediaries. It has a broadcast amount determined by its algorithm, which is limited to 21 million.
Bitcoin, unlike gold, allows interest to be generated through a process called stake which, in a nutshell, works like a fixed term in cryptocurrencies.
In recent years, its adoption grew and the price skyrocketed, being the asset that yielded the most in history.
Let’s start with the similarities between bitcoin and gold:
– They do not generate cash flow: Bitcoin and gold do not generate profit and have no income. So, as an investor, you will not be entitled to dividends or interest, as is the case with stocks and bonds. Staking allows you to generate returns in bitcoin but it is not a right that all owners have, so it is more complex.
– They are leaders in their industry: Gold is the most valuable and demanded precious metal. Bitcoin, meanwhile, was the first cryptocurrency and is the most widely used.
– They have uncertain valuation: As they do not accrue future flows, they do not have simple and universal valuation metrics, such as stocks and bonds. It should be noted that, despite the fact that both present difficulties for their valuation, that of bitcoin is even more complicated, because it does not have practical applications like gold.
But, without a doubt, the differences are greater and more decisive:
– Trajectory: While bitcoin has little history, gold has survived thousands of years and thousands of crises.
– Risk and volatility: Bitcoin is extremely volatile, so it cannot be classified as a safe-haven asset, such as gold. In addition, the correlation of bitcoin with the S&P and the Nasdaq is greater than 80%. Therefore, bitcoin behaves like another risky financial asset.
– Market capitalization: Bitcoin has a MarketCap of USD 750,000M and gold has 12,000,000M, that is, 16 times more.
– Diversity of use: Bitcoin is used only for transactions and many people use it for savings. Gold, on the other hand, also has applications in the jewelry, technology and medical industries.
– Competition: Gold has proven its leadership and value status for thousands of years. Bitcoin must go through many economic cycles to reach this condition. Although it is the first cryptocurrency and current leader, it does not mean that it cannot be surpassed as a safeguard by another, such as Ether. Let’s keep in mind that there is an immense amount of cryptocurrencies.
To give you a reference of the level of competition in the crypto world, look at the evolution “what part of the total cake” is dominated by bitcoin:
You can see that, being the first, it represented practically 100% of the crypto world. Then, with the passing of the years and the appearance of new cryptocurrencies (mainly Ether), it gradually lost preponderance.
If the comparison is made between the performance of gold and bitcoin in recent years, the difference is abysmal: bitcoin has multiplied its value by hundreds of times, while gold does not. Obviously, they are not assets for all risk profiles. Gold is more conservative.
Let’s see how they have fared in 2022, a difficult year for all risk investments:
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So far in 2022, gold accumulates positive returns, unlike bitcoin.
Which one will do better?
The crypto world is incipient and therefore its future is very uncertain. Thousands of cryptocurrencies have been created (and continue to be created), and a huge amount has already disappeared. Surely the main ones will survive, either because of their adoption or usefulness.
Future interest rate hikes will give bitcoin and other cryptocurrencies a reality check. If the adoption continues and decorrelates against the market, bitcoin will have every argument to continue outperforming gold.
Otherwise, bitcoin will continue to be one more financial asset, with a lot of risk. And it cannot be compared with the condition of refuge and coverage that gold fulfills, backed by thousands of years and crises that have passed.
To finish, I want to invite you to download for free a report that I prepared so that you can prepare for this hectic 2022. There you will find another 7 specific ideas with really surprising alternatives, which have a great risk-return ratio.
To make money in 2022 you will have to do different things. You can download it at this link: Financial Letter – 7 ideas.
Source: Ambito
