For those of us who closely monitor the money-printing activity of world governments, it’s tempting to look beyond fiat currency as a store of value. The U.S. government is particularly troubling as $23 trillion in sovereign debt should make any informed citizen shudder – and should make “alternative” asset classes like gold and Bitcoin shine in comparison.
Whether you’re a speculator or just seeking shelter from fiat money’s inevitable devaluation, gold and Bitcoin provide interesting albeit quite different possibilities.
Gold has 5,000 years of history as a store of value while Bitcoin barely has a decade, and a robust debate has pitted old-school investors against new-school traders in what often feels like a verbal duel to the death.
I certainly won’t endeavor to settle this, but if I can provide a measure of clarity at least, then I’ll consider it a mission accomplished.
Old Gold and Battered Bitcoin
It’s impractical to try to compare the price action of Bitcoin and gold since the timelines are so vastly different, but one thing is as clear as day: Bitcoin has, at least thus far, been much more volatile than gold.
The journey from a few pennies to nearly $20,000, then back to around $3,000, and then back to $10,000 per Bitcoin within 10 years indicates an accelerated timeline that makes Tesla (NASDAQ:TSLA) stock look like a savings bond.
Dirk Hackbarth, Professor of Finance at Boston University’s Questrom School of Business, summed it up succinctly (and much more mathematically than I ever could) in an email to InvestorPlace with this observation: “In terms of risk, historical volatilities of gold are dwarfed by those for Bitcoin, i.e., the cryptocurrency’s standard deviation is large relative to gold.”
When I’m coaching people on position sizing in their investment portfolios, therefore, I recommend much smaller positions in Bitcoin than in gold. The gold price hasn’t gone to zero in five millennia and won’t likely do so in our lifetimes; even President Franklin D. Roosevelt’s gold-confiscation order of 1933 (yes, that actually happened in America) couldn’t prevent gold from gaining value against the deteriorating dollar over the long run.
The price of Bitcoin, on the other hand, could conceivably go to zero. Here’s why: while the gold price tends to move inversely to the dollar, gold isn’t competing with the dollar and poses no threat to government money.
All cryptocurrencies, and especially Bitcoin, are a form of sedition against fiat currency and an executive order – or nowadays, even a single tweet – could send the Bitcoin price spiraling towards absolute zero.
Don’t believe it’s possible? China’s crackdown on cryptocurrency pummeled the Bitcoin price in 2018, and much like the dot-com bubble burst in the early 2000’s, the crypto bubble popped and took lesser coins to the digital graveyard. Bitcoin withstood the onslaught but the BTC/USD price is still nowhere near its December 2017 peak.
The Ancient and the Modern Collide
At the end of the day, the gold-versus-Bitcoin debate can be summed up in two slogans. Among Bitcoin aficionados, you’ll often hear the phrase “HODL,” which stands for “hold on for dear life.” This credo sums up the idea that one’s should expect his or her Bitcoin holdings to go up and down in value drastically – and that true crypto stalwarts should accept and embrace this roller-coaster ride.
Gold bugs also have a motto that revolves around the concept of holding – but it’s quite a different take on what it means to truly own something. They like to say that “If you don’t hold it, you don’t own it”; in other words, your stocks, your bonds – and yes, your Bitcoin – are just digital promises of value while gold is tangible, enduring, and somehow more “real.”
The implication is that if the you-know-what ever hits the fan and the financial system collapses, paper and digital assets won’t be worth anything while off-the-grid valuables, and hence physical gold, will be highly prized. Thus, while Bitcoin bulls are betting on digital-ledger-based technological advancements, gold hoarders are envisioning and preparing for the financial equivalent of the Stone Age.
For that reason, I doubt that Team Gold and Team Bitcoin will ever see eye to eye. They share common ground in distrusting the powers that be and their fiat money, but their visions of the future remain irreconcilably different and while the two camps can co-exist, their respective revolutions are responses to very distinct calls to action.
Let’s Call the Whole Thing Off
There’s no shortage of bitterness between the gold and Bitcoin fanatics on social media, and I think that’s a real shame because neither one is better; they’re just different. It’s entirely possible to invest in both with position sizes adjusted for relative volatility, as discussed – and end the debate once and for all, at least in your own mind.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.