Bitcoin and Gold: Are They Interdependent?


The relationship between gold and bitcoin is strange.

In any case, neither is very beneficial in the here and now. The promise of Bitcoin as decentralized digital money remains just that: a promise. Nobody carries gold in their hip pocket any longer to buy products or services.

After Covid-19 triggered an unprecedented worldwide recession, governments, and central banks throughout the globe, particularly in the United States, poured money into consumers’ wallets and banks’ coffers, the price of an ounce of gold and a single bitcoin jumped substantially.

Why should one invest in gold?

  • You may include gold in a well-diversified stock and bond portfolio, but it shouldn’t make up more than 10% of your assets, according to experts.
  • However, it’s critical to understand why you’re adding gold to your portfolio. Think again if it’s to keep inflation at bay. While research demonstrates that gold’s value stays unchanged over a very long period—like a millennium or two—it can’t truly be compared to other precious metals.

Why should one invest in bitcoin?

Bitcoin is a decentralized electronic payment system that is not controlled by any government. While gold has been used as a means of trade for at least 5,000 years, dating back to ancient Mesopotamia, bitcoin is a far newer phenomenon. It has seen huge price swings during its decade-long life. By the end of 2017, the cryptocurrency had risen to almost $20,000 per bitcoin, only to fall to less than $4,000 by the end of 2018 But understanding bitcoin as your first cryptocurrency is a bit complicated. Recently, cryptocurrency has been bouncing around in lockstep with equities and gold.

  • Because these price variations are often larger than those seen with gold, digital money cannot be seen as a means of storing wealth, as some claim—at least not yet.

So what are the reasons for investors to buy both?

When the Federal Reserve and other central banks across the world intervene to bail out faltering economies, gold and bitcoin tend to attract investors.

  • When governments create large amounts of money and keep interest rates near zero, their fiat currencies (currency backed by the full confidence and credit of a nation or set of nations) lose value.
  • Furthermore, when rates are so low, particularly when inflation-adjusted interest rates are zero, investors are less interested in yield-generating assets such as bonds and dividend-paying equities.
  • This might lead to a bandwagon effect, in which each new purchaser drives up the price of a safe-haven asset, even if they buy at a higher price. The risk is that a fresh event or development may derail the momentum, causing investors to flee. Then you have the unenviable distinction of purchasing high and selling cheap.

So, what are the main differences between gold and bitcoin?

Gold and bitcoin reflect two distinct stages in people’s perceptions of “money.” Gold has been used as money for millennia, and its value is maintained in part due to investors’ psychological and historical attachment to it. Bitcoin, in conjunction with blockchain technology, aspires to one day replace official currencies as a means of payment.

Gold is a more established asset in terms of investing. With the exorbitant expenses of secure storage, there’s no need to commit to holding actual gold.

The most typical approach to invest in Bitcoin is to establish an account on a cryptocurrency exchange and then swap your dollars for the digital currency. You’ll need to keep it in a digital bitcoin wallet after that.

Conclusion

Investing in gold, in general, is a bet that a more radical alternative to the present international financial system will emerge, whereas bitcoin is a wager that a more radical alternative will emerge. Therefore, bitcoin and gold are two of its own kind and not interdependent.

 

Jeff Campbell

Jeff Campbell is a husband, father, martial artist, budget-master, Disney-addict, musician, and recovering foodie having spent over 2 decades as a leader for Whole Foods Market. Click to learn more about me

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