Gold Or Bitcoin: Which One Is The Best Investment?

Gold or bitcoin? Faced with these two assets, many investors find themselves in a dilemma. And although everything related to bitcoin remains to be seen, young investors turn to it, while veterans continue to rely on the good ol’ metal to guard their capital from market risks. 

But what are their similarities and differences and when is it right to invest in one or the other?

A Unique Pair Of Assets

Gold and Bitcoin BTC/USD –unlike most other assets– mostly have no underlying income, earnings, or cash flows.

For example, people investing in stock buy a small part of a real company, which produces and sells real and tangible products. As an investor, they are entitled to their fair share of these assets, their corresponding cash flows and dividends, and any growth from both. 

The market may or may not care or reward the company for its cash flows and dividends, but investors are entitled to them regardless. These underlying cash flows directly increase shareholder profitability and also reduce risk. 

The same underlying cash flows also tie the price and valuation of an asset to reasonable levels. “Exxon Mobil XOM is unlikely to dive 90% in the next few days, barring some unexpected disaster, because if it did, the company's dividend yield would skyrocket to 63% and investors would buy the shares to benefit from its performance,” says Josh 

So, the lack of underlying cash flows greatly increases risk and uncertainty, and is a significant negative for both assets. 

Expert Opinion

Some analysts argue that the lack of underlying value means that both gold and bitcoin –mainly the latter– have no intrinsic value. 

“After all, an asset is worth the net present value of its expected future cash flows, so if the future cash flows are zero, then the asset has no value.” 

Neither bitcoin nor gold have underlying cash flows, but they are both worth something and have been worth something for quite some time, so reaching zero seems incredibly unlikely. Furthermore, this also means that both could suffer significant losses and there would be no underlying cash flows to anchor their prices or drive profitability.

In either case, the lack of underlying cash flows is a significant negative for both assets, although it does not necessarily mean that the assets are worthless.

Head To Head

When valuing bitcoin or gold, investors, however, cannot fall back on simple metrics, but most look at vague, less informative metrics like inflows and outflows, investor sentiment, demographics, etc. 

Still, writes analyst Nathan Reiff, “There are several factors that make gold a strong safe-haven asset. It’s valuable as a material for consumer goods such as jewelry and electronics, and it is scarce.”

Also, he asserts, “Gold usually performs well during corrections because even if it doesn’t necessarily rise, an asset that remains static while others decline is quite useful as a hedge.”

On the other hand, Anthony Pompliano of Pomp Investments and Morgan Creek Digital Assets says, “Bitcoin is a 100x improvement over gold as a store of value. The world is realizing this and beginning to reprice digital currency in real-time.” 

At A Crossroads

In practice, the value and valuation of bitcoin and gold are very uncertain, and in a way, they are detached from every fundamental. The valuation of bitcoin is more complicated than that of gold, as the cryptocurrency lacks significant real-world applications or non-digital pairs.

“Gold's history as a basic building block of global money is 5,000 years old and time-tested. Bitcoin is 10 years old and has existed in only one monetary regime. The standard deviation of bitcoin's price is 75%, making it a horrible store of value,” says Robert Minter, director of investment strategy at Aberdeen Standard Investments.

With the heads –and hearts– of investors divided, John Carter, founder of Simpler Trading, has a more Solomonic take: “For safety and wealth preservation, gold. For speculation, bitcoin. I think it makes sense to buy both, and for an aggressive allocation I would go 50% bitcoin and 50% gold.”