The COVD-19 pandemic began a new recession after the Global Financial Crisis of 2008. Accompanied by the conflict in Ukraine and recessive periods in the global economy, investors are making sure they don’t lose much if a new global financial crisis hits.
Most investors hold a portfolio of assets and don’t put all their eggs in one basket. Many prefer holding some portion of their portfolio in gold – one of the oldest investment-worthy assets. Gold tends to preserve its value for an extended period; thus, it helps investors cushion against it if a recessive period is about to begin. For instance, suppose you hold gold and stocks in your portfolio. If a recession hits, your stock assets will suffer a hit, and the gold reserves can help you hedge against the recession. This strategy has proven effective so far. However, we have a new asset in the world of investment providing a safety hedge to investors in times of economic turbulence: cryptocurrency.
But is cryptocurrency worth replacing gold investments? Find out.
What is Bitcoin?
Bitcoin emerged in 2009, backed by blockchain technology. Due to its decentralized nature, it opened new pathways for finance and investment. Initially, Bitcoin garnered a handful of attention, but in 2010, the price of Bitcoin grew by $0.9, and speculators gained interest in it. Fast forward to 2022, Bitcoin is the most popular cryptocurrency currently.
Now we also have a range of exchanges where you can view performance trends of various digital currencies. For instance, Bitcoin might be a huge investment now, but altcoins like Dogecoin and Ethereum may be worth checking out. You can look at the Ethereum live chart on exchange platforms, understand the highs and lows and make investment decisions accordingly.
Investors consider cryptocurrencies an alternative to gold investments because, during the pandemic, when every currency and stock was depreciating, Bitcoin remained unhinged. Noticing this, investors started pouring funds into Bitcoin, and its price hit $61,000 in 2021; however, every cryptocurrency has a different trend path than Bitcoin.
Why is gold a preferred asset for investment?
Gold has always performed well in the face of turbulent market conditions. It managed to preserve its value, and the price remains relatively constant. The steadiness in its price is why investors prefer gold investments during a recession because stocks devalue. Therefore, gold is a hedge against market recessions.
Take it this way. During the early days of the pandemic, not every investor was interested in investing in cryptocurrencies like Bitcoin. Some held their funds for investing in gold. Gold’s price increased slightly from less than $1300 to more than $2000 in 2020. However, as life slowly returns to normal and economies recover, gold’s price has dropped. However, the price of gold is still more than its pre-pandemic level.
Why is cryptocurrency a better investment than gold?
Both cryptocurrency and gold are good investment opportunities in their specific categories, one is a precious metal, and the other is backed by blockchain. Despite gold being the established system for investment in difficult times for centuries, cryptocurrencies might have dethroned it.
Both gold and cryptocurrency have retained their respective values in times of uncertainty. Although gold has been the inflation-hedge standard for years, it doesn’t always preserve its value. Specifically, it takes gold more time than cryptocurrency to regain its value and rise in price. For instance, someone who bought gold in 2010 would have to wait until 2019 to make a profitable return on their gold investment. That too, without any surety whether they will make a gain or loss. Cryptocurrency, on the other hand, though volatile, has a range of coins for you to invest in. Also, it doesn’t take a decade for the currency’s price to spike. However, that was the case for Bitcoin. Most altcoins now have highly volatile price fluctuations, making them very risky.
2.Gold has supply constraints
Since gold is a physical asset, it is subject to supply constraints. Many investors have shown concern for gold’s supply following financial uncertainty as there is only so much gold in the world. Besides, it takes up to a decade to produce a new gold mine. Also, after the Financial Crisis of 2008, gold sales decreased. Cryptocurrency, on the other hand, is digital. There are thousands of different digital coins and tokens. Although every token in circulation has a fixed supply too, Bitcoin is capped at 21 million coins. Also, blockchain technology allows verification of every Bitcoin in circulation, but that is not possible for gold reserves. The finite supply of crypto makes it a popular asset for investment.
3.Crypto doesn’t get impacted by inflation
Crypto buying and selling take place on separate exchanges than the normal economy. Because crypto is finite in supply, it is safe from inflationary pressures. It is also safe from economic and political organizations and their scrutiny. Gold is the standard for the modern-day banking sector. Therefore crypto provides a safer hedge against inflationary pressures and is a better investment than gold.
4.Decentralized nature of blockchain technology
Blockchain technology is known for its decentralization. Every transaction backed by cryptocurrency is away from government scrutiny and regulation. Unlike investing in other assets, no single authority regulates cryptocurrencies. Crypto transactions are stored in a ledger on a decentralized network of computers somewhere in an unknown location. Hash rate helps determine cryptocurrency’s security. Currencies with a higher hash rate require more computers to back them; thus, a more extensive computer network is required to attack them. Currently, Bitcoin has the highest hash rate; thus, it is the strongest.
5.Short Settlement Times and Low Fees
Unlike gold, cryptocurrencies cost less to break into the trading world. One transaction of Bitcoin or Ethereum could cost in nickels and cents to a few dollars or even more. Many people invest in cryptocurrencies for their price gains. Still, others benefit from their ease of accessibility and usage as a medium of exchange. Opting for wire transfers and bank-to-bank transactions is costly. It also takes more time for some transactions. However, this is not the case for cryptocurrencies. Transactions using cryptocurrency are rapid and take only a few seconds.
When investing in gold, there isn’t room for diversifying your portfolio with other gold-like assets. You can create a portfolio of gold, stocks, and cryptocurrencies. But having a cryptocurrency can diversify your portfolio. Diversification helps counter the negative returns of one asset by gaining from another; thus more lucrative to invest in crypto than gold.
Those mentioned above are some of the significant benefits you can derive from investing in cryptocurrency rather than gold. There are drawbacks to investing in crypto, like its highly volatile nature and price fluctuations. Still, the return from crypto is more than gold’s investment.