Investing
With fears of recession growing every day, more and more people are wondering how they can protect their assets. Traditional safe havens like US Treasuries, or precious metals like gold and silver, have remained popular in recent years. But there are other new choices that have entered the arena.
One of those is Bitcoin, the first and arguably most popular cryptocurrency. Many Bitcoin enthusiasts believe that Bitcoin is superior to gold as a safe haven asset and that it could eventually replace gold as a safe haven asset in the future.
There’s no denying that the growth and adoption of cryptocurrencies has been phenomenal. In a little over a decade they have gone from a curiosity used by hardcore crypto enthusiasts to mainstream investment assets traded on major world exchanges.
But will cryptocurrencies like Bitcoin really dethrone gold, or are they more hype than substance? Let’s look at the advantages and disadvantages of both gold and Bitcoin.
One of gold’s greatest advantages is that it’s a tangible asset. Unlike most financial assets today, you can hold a gold coin in the palm of your hand. And when you feel the heft of that coin, you realize the reason gold has always been considered real money.
As the saying goes, if you can’t touch it, you don’t own it. While you may think you can sell your stocks and bonds or withdraw money from your bank account when you need it, that isn’t always a certainty. But if you own gold, you rarely have to worry about not being able to access your wealth.
There is no counterparty risk when you hold gold because you’re the owner of your assets. If you have money in the bank, you’re a creditor and the bank is indebted to you. You have to trust that the bank will have your money when you need it, which isn’t a guarantee.
And if the bank goes under, you have to trust that the federal government through the FDIC will make you whole. It’s the same thing with bonds, that you’re a creditor and you’re dependent on the organization to which you’ve loaned money to pay you back.
You may think owning stocks solves that problem, but depending on how you buy them, they may not be held in your name, or even by your broker. Never mind the fact that stocks can crash at any time, and if the company issuing them goes out of business, your ownership share is worth nothing.
No one has to know that you own gold. If you want to buy a roll of gold coins and hide them under your mattress, no one will be the wiser. Gold coins and bars act just like cash does, and aside from having to pay taxes when you sell your gold, you can hold gold with relative anonymity.
Because gold is in universal demand, there is a ready market for it. There are always businesses or individuals looking to buy gold, and finding a ready buyer when you look to sell gold shouldn’t be too difficult.
Gold’s compactness makes it especially portable, allowing you to carry vast sums of wealth with you without attracting attention. $50,000 in gold coins can fit easily in the palm of your hand, the pocket of your pants, or inside a purse. $50,000 of $100 bills is much more difficult to conceal and may attract unwanted attention.
Gold has been trusted as a hedge against inflation for centuries. When currencies become devalued as monetary authorities try to create more money, whether debasing coins, printing more paper money, or creating trillions of digital dollars out of thin air, gold continues to maintain its value. An ounce of gold today purchases just as much as it ever has, while the US dollar has lost 87% of its purchasing power since 1971.
Gold has been a standard of wealth for millennia. When anyone imagines vast stores of wealth, their thoughts inevitably turn to thoughts of gold: heaps of gold coins, piles of gold jewelry, etc. Gold is synonymous with wealth.
That’s why central banks, despite their public rhetoric, still maintain huge holdings of gold. The Federal Reserve, European Central Bank, and International Monetary Fund may publicly express confidence in fiat paper currencies, but they’re still holding on to thousands of tonnes of gold. They know that when paper currencies collapse, gold will likely reassert itself as the ultimate form of money.
Gold is also seen as a stable asset. Its ability to maintain its purchasing power over time makes it a trusted asset for those looking to maintain their wealth and protect themselves against financial loss. That’s especially important to those looking for stability in their portfolios.
Bitcoin has gone from mere curiosity to a popular alternative investment. And its price growth since its creation has certainly been impressive.
While the days of massive price growth may be behind us, there’s a good case to be made that the Bitcoin price may continue to grow. The Bitcoin price has risen significantly over the past several months, just as gold has.
But is this due to safe haven buying or some other reason? The Bitcoin price is notorious for its ups and downs, booms and busts. And that’s not a risk that many people want to take, especially not if significant portions of their savings and investments are on the line.
Bitcoin’s algorithm is specifically designed to combat inflation. It allows for a certain number of bitcoins to be created at a certain rate, and once all bitcoins have been created, there will be no more created.
Bitcoin was specifically designed to overcome the problems of fiat currencies such as the US dollar, where the single central issuer can issue more and more monetary units, thus devaluing each unit of currency.
With Bitcoin there can be no inflation. The intention is that, instead of each unit of money growing less valuable over time, as with the US dollar, each unit of cryptocurrency will grow more valuable over time as supply is limited.
The downside to that, however, is that sometimes these units of cryptocurrency get lost. If enough of them get lost, it could impede the proper functioning of the cryptocurrency market and lead to a collapse.
One of the fears that many precious metals buyers have, especially those new to gold, is that they’ll unknowingly purchase counterfeit coins.
While it’s normally coin collectors who have had to worry about the risk of counterfeits, the quality of counterfeit coins today has risen substantially, making it more difficult for those without access to expensive testing equipment to determine real coins from fake ones.
That’s why it can be important to deal with providers who can guarantee the authenticity of your gold. Goldco works with mints around the world to source gold coins directly, in order to ensure that our customers purchase authentic gold coins.
Some of the advantages of gold can be done away with if you try to invest in gold through less-than-ideal investment methods. That’s particularly true of those who invest in “paper gold,” or in assets tangentially related to gold.
Many investors today have begun investing in gold exchange-traded funds (ETFs), which purport to offer investors exposure to gold. But investors in those funds don’t actually own gold or even a portion of that gold. They only own shares that the fund issues, which supposedly have gold backing, and they can’t convert their shares to gold.
But what is to keep the fund from issuing more shares than it has gold backing? You just have to take the fund’s word for it. Throw in the issues with custodial and sub-custodial arrangements and you have to question how much-unencumbered gold many of these funds actually own.
Other investors invest in gold mining stocks, thinking that mining company stocks will do well when the gold price rises. But energy costs could rise too, eating into company profits.
Labor disputes, import and export bans, or corporate governance issues could also result in poor stock performance. That’s why, when it comes to investing in gold, physical gold coins and bars have a distinct advantage.
The major knock on cryptocurrencies is that they’re not tangible assets. They’re merely electronic tokens that someone created out of thin air and that many people have assigned value to. Unlike gold, there’s no tangible asset to hold.
In the case of Bitcoin, each bitcoin is just an indicator that a computer has performed a cryptographic calculation and used up a certain amount of electricity. And we’ve all read the horror stories of people who lost their hard drives or forgot their private keys and thus lost all access to their cryptocurrency holdings.
Bitcoin is also dependent on electricity and the grid for its functioning. Without electricity, internet, and phone networks, the difficulty in making payments with Bitcoin or any form of digital currency or electronic payment becomes nearly insurmountable.
Think about what happens in the aftermath of hurricanes or ice storms. That’s when cash and tangible assets like gold reign supreme.
While cryptocurrencies are tolerated by the government right now, there’s no telling how long that will last. If the Federal Reserve or the federal government end up creating a digital dollar, they may decide to drive out competition through legislation or regulation.
That’s a cycle that has repeated itself throughout history, as state bank notes and federal bank notes were successively driven out of circulation in the US. China showed us the road map for government cryptocurrency by first banning Bitcoin and other cryptocurrencies, then developing its own digital currency. Who’s to say that couldn’t happen in this country too?
While Bitcoin was a great disruptive technology, there’s no way to say that something bigger and better couldn’t come along. Technology never remains static, and with future developments, there could be a new cryptocurrency developed that puts all current cryptocurrencies to shame. That’s not to say that there’s any certainty of that happening, but it’s not outside the realm of possibility.
With Bitcoin, once a transaction is completed and confirmed within the blockchain, it can’t be reversed. That was a feature intended to limit the ability of chargebacks and fraudulent purchases, but it has the unintended consequence that if your Bitcoin holdings are ever hacked or stolen, you might not be able to get them back.
Every advantage has a corresponding disadvantage, and the disadvantage of having a decentralized currency is that there is no central authority that can forcibly take your stolen cryptocurrency assets from a thief and give them back to you. That’s why taking proper security precautions to ensure the safety of your Bitcoin holdings is paramount.
The downside to meteoric price growth is that those prices can collapse just as fast. Bitcoin has seen its share of ups and downs, and is well off its all-time highs. Many have decried the cryptocurrency “bubbles” that have seemed to burst every now and then.
But despite all the setbacks, Bitcoin could continue to gain value, especially as central banks create more money out of thin air. The question you have to ask yourself is, will Bitcoin continue to grow in value over the next decade, or is it setting itself up for a major crash?
The collapse of FTX highlighted for many people the dangers inherent in the cryptocurrency sphere. It’s full of young wunderkinds who everyone trusts with their assets.
And then some of those whiz-kids disappear with those assets. Sam Bankman-Fried may have been caught, but who’s to say there won’t be others like him in the future?
Cryptocurrency markets don’t have the same track record and long history that gold markets do. And it can be hard to do the same type of due diligence with crypto companies as with gold companies, particularly for crypto firms like FTX that seem to pop up out of nowhere.
Ultimately the decision about whether to buy Bitcoin or precious metals is a decision you’ll have to make based on your financial situation, your financial goals, and your appetite for risk. But there are a few things you should keep in mind.
Volatility can be a killer for many people, and Bitcoin just doesn’t have the track record that gold does. Would you rather trust the asset that has protected wealth for thousands of years or the johnny-come-lately that has been around for only about a decade?
Thousands of people just like you have benefited from buying gold over the years. Do you want to put decades of hard work, savings, and investment on the line just to roll the dice on something that could lose all of its value overnight?
Gold has been trusted as a safe haven for centuries, and for good reason. Its ability to protect wealth through economic turmoil, financial crises, and weak economies is well documented. It will take a lot more than just a few years of hot growth for Bitcoin to displace gold as the safe haven asset par excellence.
When it comes to buying gold, it helps to work with partners you can trust. Goldco’s years of experience helping tens of thousands of customers just like you buy precious metals, and our commitment to quality customer service, makes us one of the most trusted firms in the industry.
Whether you’re looking to roll over or transfer assets from an existing retirement account into a gold IRA, looking to buy gold coins or bars to store yourself, or just interested in learning more about how gold can help protect your retirement savings, you can count on the experts at Goldco. Give us a call today to find out how gold can benefit you.
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