Gold has been used as currency and commodity money for millennia. Because of its nature, for long experts suggest that gold is a sensible asset to hedge against inflation. Now, crypto investors are questioning whether these decentralized, blockchain-based forms of currency can offer an alternative.
Ever since the ending of the silver standard in the U.S., monetary systems based on fiat currencies have become the norm in most countries. Paper money, not backed by any commodity, but rather controlled by a central bank, can have its supply increased on demand. In other words, this means that fiat monetary systems are more susceptible to inflation.
Investors and inflation hedges
In view of that, investors might take safekeeping measures for periods of inflation. Investing in gold, for example, is a traditional method for dodging market downturns. The yellow metal has a long history as an economic asset.
Nonetheless, cryptocurrencies have risen as a new alternative for storing money. Although far younger than gold, some consider them a revolution. People use them every day across the globe as payment and as a speculative investment. For this reason, investors may ask: which acts better as a hedge against inflation?
In this article, we will take a look at the main aspects of gold and cryptos. They might both be independent of fiat currencies. However, it’s their distinct features that might indicate which one serves as a better safe haven against fiat currency devaluation.
The road for crypto
Blockchain technology – the foundation of all crypto operations – started back in 2008. From then on, the use of digital currencies grew fast. In recent times, cryptocurrencies have become a new medium of investment. Moreover, their use as a speculative albeit lucrative asset influenced their fame.
Crypto owners have plenty of uses to their digital tokens. And the options increase by the day. The number of wholesalers and retailers alike that accept them as payment grows large.
As much as they are recent, cryptocurrencies resemble gold. After all, they are independent of government-issued money. In addition, they are decentralized, in other words, no single person, government or institution has control over it. Finally, taking the case of Bitcoin, they are also finite. As such, investors wonder if cryptos can withstand inflation the way the yellow metal does.
A golden history
When compared to digital currencies, gold has been around for much longer. Humanity’s fondness for the yellow metal dates back millennia. Gold has a long history as a safe haven in both the market and countless portfolios.
We may be used to gold as a financial asset. Yet, its use as currency dates all the way back to the Romans and the Ancient Greeks. In fact, precious metals as a whole had this purpose. Ancient coins best demonstrate this, struck in metals like gold, silver, and copper.
Nevertheless, experts suggest gold is an established asset for a safe investment. It is a rare and finite metal on the crust of the Earth. Experience shows that it is able to withstand unstable economies. Besides, owning it poses no default risks. The government or third parties don’t determine its price. It obeys, in fact, the laws of supply and demand.
Astute investors allocate part of their holdings into more than one medium. They do so as a means to smooth out possible risks in a portfolio. As such, the positive performance of some investments can balance the negative ones of others.
Both gold and cryptos are often seen as ways to diversify an investment portfolio. The exam of market trends and asset prices over the years sets a more careful approach.
When considering the yellow metal, for instance, there isn’t a fixed amount to allocate in. However, expert investors suggest that you could dedicate around 10 to 15% of your holdings.
Plus, it is important to note that cryptocurrencies haven’t been around for long. For this matter, it can be difficult to assess its proper arrangement in a portfolio.
Still, let’s take a look at the potential pros and cons for both investment assets.
The pros and cons of cryptos and gold
Compare the features of A and B before you make a decision.
- Highly volatile prices.
- Cryptocurrencies are a new and unproven investment that speculators are using it to store value and hedge against recessions and market corrections.
- Cryptos rely on blockchain technology to secure all transactions.
- No third parties are involved.
- No need to invest in storage.
- The price of gold tends to be less volatile.
- Gold has a long history of being used as a hedge against market downturns.
- A tangible asset that
- Owners are required to store their tangible assets in a secure location.
- Remains on your credit history for 7 years
In terms of safety, cryptos rely on blockchain technology to secure all transactions. In addition, everything is peer-to-peer, meaning that there are no third parties involved. Owners require cryptographed keys to authenticate the whole process.
As for gold, all products from most sovereign and private mints go through a minute assessment. The metal hardly corrodes, and with the proper measures is pretty distinguishable from fake gold.
On the topic of storage, gold presents a traditional approach. Owners are required to store their tangible assets in a secure location. The proper steps and tools are fundamental to assure their protection and make them theft-proof.
Whereas with crypto, all tokens consist of codes, which get written on the blockchain. As stated, owners must have access to their digital wallets for all operations. They do so through a code, or password, which they save digitally or write it out.
On the other hand, cryptocurrencies are more volatile. Investors might recall certain news or influential people’s input affecting their prices. On top of that, such volatility made them notorious for traders to speculate on.
Conversely, the price of gold tends to be less volatile. In fact, the yellow metal’s slow volatility helps justify its use as a way for securing wealth.
Here’s what you need to know
All things considered, you cannot neglect gold’s history as a safety asset. Humanity’s put it to use for thousands of years. For diversified portfolios, gold products can help store money and withstand turmoils.
In contrast, there is a clear disparity in age compared with cryptos. Such digital tokens might be a new medium for investors. However, their short period of existence makes it hard to establish which is better as an inflation hedge.
On the whole, both assets work towards diversifying a portfolio. Those who have a more dynamic and forward investor profile, might have their eyes on the crypto horizon. But resorting to established traditional practices, such as investing in gold, could be a sensible way to safely approach the benefits and the future of blockchain technology.
- Bitcoin was the first crypto currency to come around back in 2009 as a peer-to-peer cash payment. With time, investors started to look at bitcoin and other blockchain technology currencies as a speculative investment and as a store of value, much like gold;
- Gold, on the other hand, has a long history as a safe haven during times of economic crisis and as a hedge against inflation and fiat currency devaluation;
- Crypto currencies use blockchain technology to ensure a safe transaction;
- Gold is a noble metal that will not corrode over time. It does not depend on third parties to retain its value and offers no default risks;
- Whereas crypto currencies are stored digitally in the blockchain, gold requires a more traditional storage system;
- Both gold and cryptos can be seen as a way to diversify a portfolio and hedge against inflation. It all comes down to your investor profile or, in other terms, how you want to approach your investments.
Pierre Raymond is a 25-year veteran of the Financial Services industry. Driven by his passion for financial technology he has transitioned from being a quantitative stock picker to an award-winning hedge fund manager, credit risk manager to currently a RISK IT Business Consultant. Pierre is the cofounder of Global Equity Analytics & Research Services LLC (GEARS) and a current partner at OTOS Inc.