Bitcoin or Gold: Where to Put Your Money

There are two main “investment theses” to Bitcoin: that it is a better alternative to USD and that it is a better alternative to gold. These may sound like they are completely opposite of each other, but they are two sides of the same coin.

Originally, all cash was backed by gold, so there was a fundamental reason why it was valued at a certain price. You could take the total value of all the gold backing the currency and divide it by the outstanding bills to get approximately a dollar. They were interlinked in price until it was considered infeasible to keep buying so much gold.

Now, they aren’t tied to each other and investors generally view gold as an alternative currency to USD. What this means is that investors will invest in gold when they believe the future outlook for the US is looking poor.

For example, if the US was going into a financial crisis and it seemed like the Federal Reserve was gearing up to print more USD, prudent investors would move their funds out of USD into a safer haven, like gold.

None of this is new, but this explains why many treat Bitcoin the same way. Bitcoin also has this counter indicative view. In recent weeks as the trade wars have intensified, Bitcoin and gold have both seen a considerable increase in price. Any level of uncertainty causes investors to move their money this way.

Gold Vs. Bitcoin

But how does gold compare to cryptocurrency. This is an argument that could go on many thousands of words, but the crux of it is that gold is a physical asset and Bitcoin is a digital one. These each come with strengths and weaknesses, but this explain how Bitcoin can be in competition with both gold and USD.

Both gold and BTC function as a signalling mechanism for where the economy might go and how the other asset will perform.

Turnmoil Around the World

So with tariffs being threatened and the Federal Reserve trying to determine their next move, a safe haven asset makes sense. But rather than going full goldbug or crypto-anarchist, I would suggest holding a bit of both.

This is probably the first big macroeconomic shakeup since Bitcoin entered the mainstream, and the expected rally in gold may end up being split between the two assets. Geopolitical drivers will cause the shift of funds, but recent technological shifts have enabled Bitcoin to benefit from this just as much as gold.

However, the one big difference is that gold has been around for thousands of years, whereas Bitcoin has only been around for a decade. It is still being adopted by different companies, which is why many investors might see it as “being sold at a discount” right now.

As trade wars and inflationary pressures heighten, it is hard to argue that we need an alternative to the USD, but what can be argued is how these dynamics will play out between BTC and gold. A more moderate approach is to put money in both these safe haven assets, as they will likely both increase over the next few years of turmoil.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock. Chart via Bloomberg.