Gold vs Crypto | Looking for Alpha

[ad_1]

Brad Barket/Getty Images Entertainment

You just can’t get that look with cryptocurrency. But, maybe even better with an NFT?

Gold is the original speculative asset, but also the original currency and currency hedge. In recent years, people have replaced gold with cryptocurrencies for all these purposes. They had a wild ride, to say the least. Crypto investors tend to be younger and think it’s different this time around because cryptocurrencies are really better as a currency and an investment than gold. Gold investors tend to be older and like the stability and long history of gold.

Gold is money. Everything else is credit. JP Morgan

I want bitcoin to go much lower so I can buy more. Marc Cuban 12/19/22

The Golden Rule: Whoever has the gold makes the rules. Attributed to a 1967 Wizard of Id comic

This article will compare the benefits of gold to the benefits of cryptocurrencies. My readers know that I love lists. Below are lists of reasons to own cryptos instead of gold and then justify owning gold instead of cryptos.

Advantages of cryptocurrencies More trendy, crypto is part of the culture of young investors. He is also pushed by many other influencers such as Elon Musk, Matt Damon, Tom Brady and Mark Cuban. Larger infrastructure There is a much larger infrastructure of parties pushing crypto investing than gold. These include dealers, miners, mining equipment manufacturers, traders, token issuers, software publishers, and influencers who use it to gain followers. No storage costs Physical gold must be stored and often insured. Easier to Create Tokens can be created from thin air compared to gold which is increasingly hard to find and intensive to mine. Of course, economics dictates that more supply means lower prices. Alternative to weak fiat currencies Although cryptos are volatile, they are actually less volatile than some national currencies that face hyper inflation. Gold Mining Yield If you own a gold mining stock, even if the price of gold goes up, you can lose if the miner struggles to find enough gold to be profitable. Reasons to Choose Gold Over Cryptocurrencies Industrial Uses – Gold has many industrial uses. It is widely used in circuit boards, computer chips and transistors. In fact, I invested in a company that recovers gold from used computer and phone parts. Crypto has no physical utility. Consumer Uses – Gold is heavily used by consumers. Its greatest use is for jewelry. Some large societies like India use jewelry both for fashion and as a store of wealth. Crypto again has no physical use. Monetary uses Gold is accumulated by governments as a safety net for their currencies. Gold holdings strengthen their currencies. Only one government (El Salvador) is currently trying to do so without success so far. Safer than cryptos – Gold is safer than cryptos. There is no key to lose. There are no losses due to hacking. Gold brokers are safer – Accounts are not currently lost in bankruptcy, as is currently the case with FTX. There is not a surge of dealers and traders like there is currently with cryptos. Less volatile The price of gold does not jump far from what cryptos have. In the last 3 years alone, the value of cryptos has dropped by 40% three times and over 65% twice. Less manipulated There are thousands of cryptocurrencies. Many of the smaller ones are easily manipulated by their sponsors. Turns out FTX did it with two cryptocurrencies. Environmentally friendly Gold mining consumes a significant amount of energy. But that pales in comparison to mining cryptos. In fact, crypto mining currently consumes 0.9% to 1.7% of total electricity consumption in the United States. This range of electrical use is similar to any home computer or residential lighting in the United States. There is much less pollution in the environment. Lower energy prices So you think global warming is a hoax? Then consider that the massive energy consumed in mining for cryptos drives up energy prices. Dividends – You can own gold miners and get dividends at market rate. There are of course also crypto miners, but few of them are paying dividends at the moment, and even fewer are making a profit. Additionally, gold mining stocks are less volatile than crypto mining stocks. Less New Supply The first thing they teach you in any economics course is that pricing is a function of supply and demand. The supply of cryptos is skyrocketing. There are over 20,000 different cryptocurrencies and thousands more are added every year. The amount of tokens for each of these cryptos is also growing rapidly because it is much easier to mine cryptos than gold. Meanwhile, only about 2% of the new gold supply is taken from the ground each year. Gold is difficult to extract. It has been mined for thousands of years and the easy stuff has been found. But the demand for gold is growing at more than 2% per year, giving it guaranteed built-in inflation. Age of Sobriety Don’t hit this one as it may be the most important right now. Suppose cryptos are not in a bubble. After a period of massive speculative activity, the economy typically experiences a recession followed by a period of sobriety. This happened in 1929 after the Roaring Twenties, again in 2001 after the dot.com crash and in the property markets from 2007. This time a number of bubbles burst. These include hypergrowth stocks, IPOs, SPACs, meme stocks, options trading, and NFTs. Investors have been badly burned and will be less inclined to pursue riskier investments for some time. These are often the same younger investors who buy cryptos. This bodes ill for cryptos. Markets are regulated Gold is part of the traditional investment world which is heavily regulated. There is notoriously little regulation with cryptos and it has been a wild west of hacks, underground dealers, scams, hype and false advertising. Error refund or cancellation policy Gold resellers are established and have error refund or cancellation policies. They have been around for quite some time. FTX is an example of a crypto dealer that had few policies for anything. Long term proven – Gold has been shown to increase in value over the long term, over 5,000 years. Many substitutes have been promoted over the years, but none have so far rivaled gold as a store of value outside of national currencies and real estate. Inflation Protection Not only did cryptos not provide any protection against inflation the first time around, but their value actually dropped significantly when it broke. Gold provided long-term inflation protection. However, its value was only flat as inflation raged over the past couple of years. This is probably mainly due to a rise in the dollar. It provided strong inflation protection to most other parts of the world during this period. Credibility – Dogecoin issued as a joke has become one of the most valuable cryptos. Value not based on anything rational other than what someone unaffiliated with the coin (Elon Musk) says and does. It is powered strictly by hype and sentiment. The fact that it actually outperformed Bitcoin and Ether, the two biggest cryptos, doesn’t help the credibility of the category. There are over 20,000 cryptocurrencies, making it a nightmare to track and figure out which ones are legit. There is only one gold. Take away

Cryptocurrencies have not had an impact on gold, contrary to what you might think. The rise and fall of crypto should have had the opposite reaction for gold, and it really doesn’t. Gold has been much more affected in the last two years in the United States by the strength of the American dollar.

There is clearly a lot of passion and a dedicated base for both gold and crypto. Gold at this point is still superior to cryptocurrencies for most functions such as a store of value and a hedge against inflation or a weak economy. It also has many physical uses that cryptos do not have, such as jewelry and modern electronics.

The crypto market, like many newer major markets, is volatile, speculative, riskier, and more vulnerable to manipulation and hacking. Crypto, in my opinion, is too volatile for anyone over 40 saving for retirement. It could possibly exceed that, but it will require a lot more regulation and standards. Gold and cryptos can be used in the short term by traders using technical analysis. But I don’t recommend putting a significant portion of your portfolio into speculative activity.

While the value of gold moves with global economic conditions, jewelry usage, trading usage, hedging usage, inflation, and national economic policies, cryptos mostly move through sentiment and the hype. This has been proven over the past three years as cryptos rose as other speculative activity rose and fell rapidly when these speculative bubbles burst. The prices of both are impacted by supply and demand, but the supply of gold is only growing at around 2% per year, while the supply of crypto is skyrocketing.

I don’t predict the cryptocurrency category will disappear anytime soon, although most smaller ones probably will. There are too many entrenched interested parties. But cryptos have too many problems for most investors. It’s currently based on hype and marketing, and there’s been more marketing than ever recently. There has always been a lot of hype surrounding gold, but it has many advantages over crypto. Despite its problems, gold has proven itself over the long term.

Investments

If you want to own gold, there are three main ways; physical gold, a gold ETF such as GLD and the possession of miners. I recommend a miner ETF such as GDX or GDXJ (junior miners). These are more influenced by the price of gold than GLD and pay a dividend. By leverage, I mean they move more than gold when gold prices change. They also greatly reduce the risk of poor mining results by diversifying among a number of companies. For a speculative crypto play, consider the Grayscale Bitcoin Trust (OTC:GBTC) which recently traded at around a 50% discount on its bitcoin holdings. It is also much more liquid than holding the cryptos themselves and limited to the largest cryptocurrency.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.

[ad_2]