Gold Versus Crypto

Summary This article details the advantages of investing in gold versus cryptocurrencies. Factors looked at include supply and demand, sentiment, hype, uses, volatility, energy, safety, hedging, and creation. One is clearly superior as an investment or hedge. You just can’t get this look with cryptocurrency. But, perhaps even better with an NFT? Gold is the original speculative asset but is also the original currency and currency hedge. In recent years people have been substituting cryptocurrencies for gold for all of those purposes. They have been on a wild ride to say the least. Crypto investors tend to be younger and believe it's different this time as cryptocurrencies truly are better as a currency and investment than gold. Gold investors tend to be older and like the stability and long track record of gold. “Gold is money. Everything else is credit.” – JPMorgan “I want Bitcoin to go down a lot further so I can buy some more…If you have gold, you're dumb as f***.” Mark Cuban 12/19/22 “The Golden Rule: He who has the gold makes the rules.” – Attributed to a 1967 Wizard of Id comic strip This article will compare the advantages of gold to the advantages of cryptocurrencies. My readers know I like lists so below are lists of reasons to own cryptos instead of gold and to then reason to own gold over cryptos. Benefits of Cryptocurrencies More trendy – Crypto is part of the culture of younger investors. It is also pushed by many more influencers such as Elon Musk, Matt Damon, Tom Brady, and Mark Cuban. Bigger infrastructure – There is a much bigger infrastructure of parties that push crypto investing than gold. These include dealers, miners, mining equipment manufacturers, traders, token issuers, software companies and influencers who use it to gain followers. No storage fees – Physical gold has to be stored and often insured. Easier to create – Tokens can be created from thin air versus gold which is increasingly difficult to find and intensive to mine. Of course, economics dictate that more supply means lower prices. Alternative to weak fiat currencies – Although cryptos are volatile, they are actually less volatile than some national currencies which face hyper inflation. Gold mining yield – If you own a gold mining stock, even if the price of gold goes up you can lose if the miner has trouble finding enough gold to be profitable. Reasons to choose Gold over Cryptocurrencies Industrial Uses - Gold has numerous industrial uses. It is used heavily in printed circuits, computer chips and transistors. In fact, I invested in a company that recovers gold from used computer and phone parts. Crypto has no physical use. Consumer uses - Gold is heavily used by consumers. Its largest use is for jewelry. Some large societies such as India use jewelry both for fashion and a store of wealth. Crypto again has no physical uses. Monetary uses – Gold is accumulated by governments as a backstop for their currencies. Gold holdings strengthen their currencies. Only one government (El Salvador) is currently trying to do this with almost no success so far. Safer than crypto - Gold is safer than cryptos. There is no key to lose. There are no losses due to hacking. Gold brokerages are safer - Accounts are not currently being lost in bankruptcy such as is currently happening with FTX. There isn’t a wave of dealers and traders going under like there is currently with cryptos. Less volatile – The price of gold does not jump around anywhere near what cryptos have. In the past 3 years alone, the value of cryptos have dropped 40% three times and by over 65% twice. Less manipulated – There are thousands of cryptocurrencies. Many of the smaller ones are easily manipulated by their sponsors. FTX it turns out did this with two cryptocurrencies. Environmentally safer – Mining gold consumes a significant amount of energy. But it pales in comparison to mining cryptos. In fact, crypto mining currently consumes 0.9% to 1.7% of total U.S. electricity usage . This range of electricity usage is similar to all home computers or residential lighting in the United States. There is way less pollution to the environment. Lower energy prices – So you think global warming is a hoax? Then consider the massive energy consumed in mining for cryptos drives up energy prices. Dividends - You can own gold miners and get market rate dividends. There of course are crypto miners too, but few are paying dividends right now, let alone making profits. Also, gold mining stocks are less volatile than crypto mining stocks. Less new supply – The first thing they teach you in any economics class is pricing is a function of supply and demand. The supply of cryptos is skyrocketing. There are over 20,000 different cryptocurrencies with thousands more getting added annually. The amount of tokens for each of these cryptos is also increasing rapidly as it is much easier to mine cryptos than gold. Meanwhile, there is only about 2% of new supply for gold pulled out of the ground each year. Gold is hard to mine. It has been mined for thousands of years and the easy stuff has been found. But the demand for gold increases by more than 2% a year, giving it a guaranteed built in inflation. Age of sobriety – Don’t knock this one as it may be the most important right now. Let’s assume cryptos are not in a bubble. After an era of massive speculative activity, the economy usually has a recession followed by an age of sobriety. This happened in 1929 after the Roaring 20s, again in 2001 after the dot.com crash and in real estate markets starting in 2007. This time a number of bubbles have burst. These include hypergrowth stocks, IPOs, SPACs, meme stocks, option trading and NFTs. Investors have been burned badly and will be less likely to pursue riskier investment for quite a while. These are often the same younger investors as those buying cryptos. That bodes poorly for cryptos. Markets are regulated – Gold is part of the mainstream investment world which is heavily regulated. There is famously little regulation with cryptos and it has been a wild west of hacking, fly-by-night dealers, scams, hype and false advertising. Refund or cancellation policy for errors – Gold dealers are established and have refund or cancellation policies for errors. They have been around a while. FTX is an example of a crypto dealer that had few policies for anything. Proven long haul - Gold has proven to increase in value over the long haul, over 5,000 years. There have been many substitutes promoted over the years but none have to this point rivaled gold as a store of value outside of National currencies and real estate. Inflation protection – Cryptos not only provided no inflation protection the first time out, they actually declined significantly in value when it flared up. Gold has over the long term provided inflation protection. However, it was only flat in value as inflation raged over the past two years. This is probably mostly due to a surge in the dollar. It did provide strong inflation protection for most of the rest of the world over that period. Credibility - Dogecoin issued as a joke has become one of the most valuable cryptos. Value not based on anything rational other than what one person unaffiliated with the coin (Elon Musk) says and does. It is propelled strictly by hype and sentiment. The fact it has actually outperformed Bitcoin and Ether, the two largest cryptos, doesn’t help credibility for the category. Fundamentals Only one – There are over 20,000 cryptocurrencies making it a nightmare to track and know which ones are legit. There is only one gold. Takeaway Cryptocurrencies have not impacted gold is much as you would think. The rise and fall of crypto should have had an inverse reaction for gold, and it really didn’t. Gold was much more impacted the past two years in the U.S. by the strength of the U.S. dollar. There is clearly a lot of passion and a dedicated base for both gold and crypto. Gold at this point is still superior to cryptocurrencies for most functions such as a store of value, and a hedge against inflation or a weak economy. It also has numerous physical uses that cryptos don’t, such as jewelry and in modern electronics. The crypto market like many large newer markets is volatile, speculative, riskier and more vulnerable to manipulation and hacking. Crypto, in my opinion, is too volatile for anyone over 40 saving for retirement. It may eventually move past this but that will take much more regulation and standards. Both gold and cryptos can be used short term by traders using technical analysis. But I do not recommend putting a significant portion of your portfolio in any speculative activity. While the value of gold moves with global economic conditions, jewelry use, commercial use, hedging use, inflation and national economic policies, cryptos move primarily through sentiment and hype. This has been proven the past three years as cryptos surged as other speculative activity surged and fell rapidly as those speculative bubbles burst. Prices for both are impacted by supply and demand but gold supply only increases about 2% a year, while crypto supply is skyrocketing. I am not predicting the cryptocurrency category will go away anytime soon, though many of the smaller ones probably will. There are too many entrenched interested parties. But cryptos have too many issues for most investors. It’s currently based on hype and marketing, and there has been more marketing than ever recently. There has always been a lot of hype around gold too, but it has so many advantages over crypto. Despite its issues gold has proven itself over the long haul. Investments If you want to own gold, there are three primary ways; physical gold, a gold ETF such as GLD, and owning the miners. I recommend an ETF of the miners such as GDX or GDXJ (the junior miners). These are more leveraged to the price of gold than GLD and pay a dividend. By leveraged I mean they move more than gold when gold prices change. They also significantly reduce poor mining results risk by diversifying among a number of companies. For a speculative cryptos play consider the Grayscale Bitcoin Trust ( GBTC ) which has been trading at around a 50% discount to its bitcoin holdings recently. It is also much more liquid than holding the cryptos themselves and limited to the largest cryptocurrency.