Gold or Bitcoin, Which Is The Better Investment?
Gold or bitcoin? It’s a question you might ask yourself in this economic climate. One is a store of value from Ancient Babylonian times. The other is modern, digital, and mathematically programmed to get scarcer by the day. Both can’t be debased like fiat currencies. Gold bugs hoard gold. Bitcoiners HODL bitcoin. Both cost money to mine. Which is the better investment?
Why invest in gold?
There’s an old saying in investing: “own gold and hope it doesn’t go up.” That’s because gold is the world’s oldest safe-haven asset. It’s held purchasing power through empire collapses and world wars, and protected investors during multiple stock market sell-offs (green areas, below). If you’d invested $100 in gold when President Nixon ended the gold standard in 1971, it’d be worth about $4,600 today (~7.6% growth per year). That same investment in the S&P 500, meanwhile, would be worth about $400 less. So not only has gold multiplied against the greenback over the past 50-plus years, but it’s kept up with stock prices too.
Why invest in bitcoin?
Gold bugs and bitcoiners have one thing in common. They’re both anxious about the debasement of money, so they hold a finite asset that can’t be printed by central banks. During the reign of Emperor Nero, the Ancient Romans started debasing gold aureus coins to fuel the growth of their empire. As time went on, each coin contained lesser precious metal content – until they were mostly made of cheap base metals. Now, central banks print money out of thin air to grow the economy. While a bumpy ride, bitcoin (blue) has so far been a stellar hedge against money supply debasement (grey).
So which is better, gold or bitcoin?
If you’re after a battle-tested store of value and safe haven, gold’s long-term track record speaks for itself. And it’s way less temperamental than good ol’ bitrocket. But if you can stomach bitcoin’s volatility, it could compensate you with bigger gains over time. Bitcoin’s market size is only about 4% of gold’s – so it’s got a lot more room for growth. Unlike gold, bitcoin is a new technology, so it tends to behave more like a tech stock at times.
What about owning both?
If you’re all about getting bang for your risk buck, owning gold and bitcoin could be the smart play. I used Portfolio Visualizer to test that going back to the start of 2014 (before then bitcoin grew too fast, so the results would be ridiculous). I checked what would’ve happened if you’d invested $100 in gold or bitcoin, or a 50:50 split between the two. And I rebalanced the 50:50 portfolio yearly back to its original split to keep the risk down. The 50:50 portfolio (blue line) mostly kept up with bitcoin on its own (black line) – but it was a much smoother ride.
The table below digs deeper into the results. You can see the 50:50 portfolio had the highest Sharpe ratio (return over risk) of the three. And its worst year was a whole lot easier to stomach than bitcoin’s.
At the end of the day, you might prefer one over the other. But know this: bitcoin and gold go together like Batman and Robin in the world of wealth protection.
Key points
- Gold has held its value for thousands of years. No other asset even comes close to that.
- Bitcoin tends to rocket when the Fed and other central banks increase the money supply.
- Each investment has its merits and risks. But you could get the best of both worlds by diversifying between the two.
