During the pandemic, many people including me as a teenager started to explore investment options beyond stocks and mutual funds. I started to ask my parents and grandparents about their opinions of investing. The usual answer I got was bank FD’s, EPF & Gold. Yes, you read that correctly! Indians love storing gold in various forms and factors as an auspicious metal. My Grandpa even advised me to keep accumulating Gold during financial progress to save from unfortunate times. That advice sounds boring especially to our EMI-addicted generation which loves trading speculative assets having the face of dogs.
That fundamental choice of a safe-haven asset class strong enough to save one from a financial crisis, high inflation rates made me question my own notions about investing. Both Bitcoin and Gold have their own pros and cons. This article can be taken as a summary for both the assets. So let’s start with Gold.
What makes Gold Precious?
Dating back more than 5,000 years. Gold has been with humans for a long time. It has been tried and tested as a medium of exchange, store of value, decorative item, etc. The yellow shiny metal has a unique property that makes it so rare and precious. Unlike metals like Iron, Copper or Silver, Gold isn’t found in abundance.
The social status linked with having more Gold today makes the demand keep growing every year. The biggest advantage of Gold which sets it apart from paper money is that nobody can fake it. You can’t fake Gold. I do agree we have those Gold ETF’s or bonds issued by Central Banks (ie, Sovereign Gold Bonds) but those are as terrible as Fiat money. Real Gold in physical form can’t be faked.
Central banks before 1971 used to follow Gold Standard as a mode of issuing new currency notes. It simply meant that a country’s currency was linked to Gold. What happened after 1971? Well, that’s a separate story but the chart summarises it in short. Gold became more expensive.
What we saw during the pandemic was a search for safe-haven assets. While the stock markets were crashing, certain groups of people were trying to hedge their positions with Gold. Not only did this happens during the pandemic, earlier events like wars, currency inflation & many more drastic events in history saw people storing their wealth in Gold.
Pros of Gold
- Despite of rising demand, the supply is very low.
- The metal is valuable in jewellery and consumer goods.
- Central banks prefer holding gold as a store of value with them.
- It is legal and regulated by the government.
- Can be accessed easily by people from all economic backgrounds without technical knowledge.
- Can’t be faked.
Cons of Gold
- Heavy and expensive to move around. You can’t move $1 million worth of Gold single handedly.
- Has a risk of getting stolen.
- Low price volatility. Can be good for holders but not traders.
- May not be valuable in future if Bitcoin takes over the investors as a superior alternative.
What makes Bitcoin Precious?
Apart from the speculation around Bitcoin, it takes all properties of Gold and takes it a level up. Bitcoin is a blockchain-based digital asset with no physical form factor available. A total of 21 million Bitcoin will ever exist as was written in its white paper and verifiable on the open-sourced code. Each and every bitcoin can be traced on the blockchain and the issuance, supply and transactions are all happening in front of the public in real time.
Since its inception in 2009, every 4 years the block reward gets cut in half. For example, if miners validated a block of transaction back in 2009, they would have received 50 bitcoins worth about $3,027,655.00 today. In 2021, for the same transaction, only 6.25 bitcoins are awarded as a block reward to the miners. This is how new bitcoins come into circulation and with every four year cycle, the supply will keep falling short. On the other hand, Gold doesn’t have any such stock to flow pattern predicting its future availibility.
Similarly as more investors are getting aware of Bitcoin, money is flowing to Bitcoin pushing up the demand further. A hard money like Bitcoin can’t be faked just like Gold, and central banks can’t print more bitcoins. The biggest reason why Gold and Bitcoin are so precious is probably because of the limited supply and the social status attached with them. Shares can be created by companies, money can be printed by the government but no one can fake hard money.
Pros of Bitcoin
- Since Bitcoin is not a physical resource like Gold, you don’t need to think of storing it safely offline. All you might need is a strong password with 2fa or an hardware wallet to keep it safe. Exchanges also have a big role in safekeeping of user’s funds. Therefore, online privacy and safety is a crucial part to keep your Bitcoin wealth safe.
- It is easy to send overseas in minutes. You can transfer $1 to $1 billion dollars or more in Bitcoin just in seconds. Carrying gold worth that much would be a big hassle but Bitcoin is easy and fast.
- Has high liquidity like Gold. If you want to cash out your bitcoins anytime, you can freely sell them on any exchange or offline. Bitcoins are valuable on any nation be it India, US, Japan, Singapore, etc. Unlike Fiat money which works only on a country basis.
Cons of Bitcoin
- Has high volatility as of now. Gold has been tried and tested for thousands of years but Bitcoin has been around only for a short span of time. That lack of credibility could be a downside for many people. If you’re willing to bet on a new asset class then that should not discourage you from participating in it.
- Can be stolen in case of a hack. If the wallet you are storing your bitcoins in gets hacked, chances of getting back those are next to zero. Banks or the government can’t help you in getting back those bitcoins.
- If you loose wallet keys then Bitcoins will be lost forever. Wallet keys or seed phrases are a password without a “forget password” option.
If you’re willing to invest or diversify into hard assets then Gold or Bitcoin can be great picks. Although I’m a fan of Bitcoin but Gold is also good enough if you don’t want to risk your savings into something that’s new. But please don’t save fake money. Anything that can be created is fake.