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The more Bitcoin falls from highs and gets stuck in routs, the more ridiculous it feels to compare it to gold. After all, gold never disappoints, right?
A close look at the precious metals market tells us that we could apply the same harsh judging criteria to the yellow metal as we do to crypto, and it would oftentimes leave wanting.
Right now, those who favor gold and disdain crypto are once again coming out of the limelight and stating that crypto has no business being in this conversation.
Bitcoin and the rest of the market are on the tail end of weeks of downwards pressure. We didn't hear much about BTC's recent reclaiming of $30,000, but we did hear lots about the plunge to $28,000 weeks prior.
Perhaps it's the lofty price tag that Bitcoin was accompanied by at several points of its very young tenure in the markets. $60,000, $65,000 and $68,000 all looked like normal valuations. So falling to $29,000 obviously has some wondering what gives.
The truth, however, is that the same can be observed in the gold market. In these comparisons, gold only benefits by being valued in ounces. So its drop from $1,910 in 2011 to $1,200 and barely above over the following years doesn't look as massive. But it was.
Better rivals than is made out?
As crypto comes under a series of meltdowns, gold is holding fairly strong above $1,850 an ounce. It was $1,950 not too long ago, but that's something you likewise won't hear as often as "crypto crashing". Nonetheless, we'll go into why Bitcoin's bearish stretches tend to be overplayed in comparison to those of other assets.
Because gold is performing fairly well now, comparisons between the two seem almost bizarre. How could we compare the top hedge to something that everyone is saying could be wiped off? Bitcoin and gold, in actuality, make for better "rival" assets than die-hard proponents of either would like to admit.
Furthermore, instead of choosing between one or the other in your IRA, there is very much room to sensibly invest in both. But, because of how fundamentally different they are, your investment approach to them should differ as well.
So long as you understand the roles, benefits and drawbacks of both, neither will have you disappointed. Compared to stocks and bonds these days, even a crypto bear market looks appealing. But let's first get into how the two started being compared.
Gold vs Bitcoin: what's so similar about them?
Beyond any other reason, the fixed supply of both is what's causing the comparison. The fixed supply ties craftily into some of their respective properties, like privacy, decentralization and independence, that are also shared.
So much so, that their differences can get swept under the rug. Calling Bitcoin "digital gold" is very common. It might be more accurate to say that it's a good simulator for anyone wishing to avoid gold investment altogether.
Both gold and Bitcoin have a fixed supply, one's somewhat more clearly defined than the other's. Bitcoin was created with the sole purpose of battling back central bank manipulation and dealing with the toll it has on individual wealth.
It originated as a digital currency that couldn't exceed a 21 million token supply. These tokens are "mined" using somewhat specialized computer hardware. And though 19 million are already available, expectations are that we won't reach 21 million Bitcoin for more than a century.
Incidentally, the same financial crises wrought on by central and private banks are also a main selling point for gold. The World Gold Council often reminds us of central banks' massive and ever-expanding stockpiles of gold.
And yet, they generally refuse to even acknowledge the metal's existence, nevermind its role in the financial system. According to them, finance has moved on, along with a necessary free-floating currency on behalf of every nation.
Though gold was officially untethered from fiat currency in 1971, individual investors have remained unconvinced. Gold price was $35 an ounce at the time of untethering and now sits at $1,850. It tells us a few things, starting with just how much the U.S. dollar has lost when it comes to purchasing power.
Gold is mined in a more traditional fashion, and its supply isn't necessarily fixed, as we don't know the amount. We do know, however, that gold miners have been having a progressively harder time obtaining ore.
Gold's overall supply picture, especially post 2011, is generally considered dismal next to its demand side. Obtaining it was always difficult, and by the looks of it, it's only going to get harder.
Related: How to Buy Gold and Bitcoin with Your 401(k) - Free Investor Kit
More similarities abound...
We mentioned other similarities that are just as prominent, and we meant it. Neither gold nor Bitcoin are issued by a third party in any strict sense. They don't have counterparty risk.
They don't depend on a company, currency or government's standing on behavior. Any of the listed can crash, and the two assets will persist.
They offer unprecedented liquidity and privacy as mediums of exchange. Each can be treated as a currency and used to make transactions "away from prying eyes".
The recent breakout of the conflict in Russia and Ukraine has served as a reminder of the importance and strength of these properties. Both the attacking and defending nations have seen their currencies depreciate. For Ukrainian citizens, gold and Bitcoin were some of the only reliable means of storing wealth.
For Russia, gold's benefits extended past that. Its massive bullion stockpile allows it to mostly avoid international sanctions or stall in a manner that makes commerce, or merely day-to-day operation, possible.
These kinds of real-world value examples are something that few, if any other assets can boast. It's because of this that investing in either seems like a straightforward choice. But the approach is what sets apart good and bad investment in both sectors.
Gold's role as an asset
We all want to play up gold's performance, and why not? Its fall from $1,910 only to recapture that level a decade later has been remarkable to some and expected to others.
But certainly, $1,910 gold was a very optimistic forecast even just a few years ago. The metal moves up, but slowly. It outperformed the S&P 500 Index over the past 20 years, but stocks' quick and volatile returns are what's getting them the limelight.
Here, maybe the most important thing about gold investment comes to prominence, and that is long-term orientation. Gold investors are meant to have a minimum of a 5-10 year period of allowance before making the verdict on whether they made a good investment.
Besides large traders of paper gold, nobody really gets into precious metals to sell them off within a year or two.
And that's why, for all of gold's performance, the metal still remains primarily a defensive asset. You buy physical gold for defensive purposes, with portfolio-protecting ideas in mind. Depending on your allocation, you will either treat the precious metal as a crisis failsafe or a primary inclusion to guard against a number of calamities.
The metal's ability to withstand one crisis after another is why so many investors buy it. Even protecting wealth from inflation comes secondary, let alone all the other perks frequently touted.
So while the gold in your IRA might appreciate nicely, it's really there as an anchor. Something to offer stability and, just as importantly, give faith when every other asset class is lapsing.
Bitcoin's role as an asset
Bitcoin's staunchest proponents will have you believe that these are all non-factors. A reliance on a functional network of independent validators and internet access, to them, don't merit a mention when both are easily available. But what happens when they aren't?
It's often remarked how Bitcoin is more stable than the traditional financial system. It ought to be, given that it's meant to be a replacement for it.
When these remarks are made, it's pointed out that the Bitcoin network has never been hacked or was offline. All valid points. But they leave opening to the notion of the network being hacked offline. Can anyone think of this happening to the gold network?
While neither has counterparty risk in the traditional sense, we quickly realize that Bitcoin is less dependable right off the bat. And the more we go into the various risks associated with Bitcoin investment, the more we understand why a different investment approach is necessary.
Bitcoin shouldn't act as a replacement for gold, be it in your IRA or otherwise. It can be seen as a similar, though riskier bet. And once it is, you'll quickly find that your Bitcoin investment somewhat closely resembles stock exposure.
You'll constantly be on the lookout for price swings up and down. Maybe the market has a nice surprise for you today? Or maybe it sank so much everyone is screaming bust again? This kind of risk tolerance isn't for everyone, but risk can and does have a place in any portfolio.
Gold vs Bitcoin in your IRA: what to watch out for?
The aforementioned approach will have already primed you for some sensible investment in both gold and crypto. For starters, you'll understand that you're making long-term bets on two assets, one safe and one risky.
Reassessing portfolio theory
Part of what has made people attracted to self-directed IRAs is the option to invest in alternate assets such as these.
You probably heard of the 60/40 portfolio theory, or the view that a portfolio should consist of 60% risk in the form of stocks and 40% safety in the form of bonds. Money managers used to adhere to it, and providers of employer-sponsored retirement plans often enforce this.
But what happens when both stocks and bonds are making one want to look the other way? As new investment classes come about and others' roles get reimagined, people are now assessing both stocks and bonds carefully.
Stocks are clearly getting ready to complete their longest bull run in history, with a steep and lengthy selloff next in the books. The global bond market is in a crisis marked by negative returns, a historic anomaly that is only being temporarily managed by Treasuries' comparative good performance.
Investing in gold, Bitcoin or both in your IRA lets you move away from traditional markets and into alternative ones. Again, depending on your allocation, you might find yourself completely unbothered by stock or bond market collapses while everyone else freaks out.
Applying gold and Bitcoin to a portfolio properly
However much exposure you have to either gold or Bitcoin, you shouldn't lose track of your initial investment goals.
Gold is there to protect against risks in other markets and overall uncertainty. It's there to hold value when everything else is crumbling. So long as it does this, and it hasn't not done so yet at any point in history, it's doing what you want it to.
Even a 30%+ price drop should be inconsequential to the gold investor. As any long-term chart has shown, gold will recapture that level eventually, and it will have stayed true to its purpose while doing so.
On the other hand, safety isn't really something associated with Bitcoin investment. That we are now talking about pegging Bitcoin to the U.S. dollar due to the former's fixed supply shows just how badly monetary policy has failed. Bitcoin, along with other cryptos, are simply too risky investments to not be treated as such.
Your Bitcoin investment, as that in other tokens, should be in line with what you might want to allocate to stocks. The assets in the crypto market are a lot more correlated than those in stocks, but not outlandishly more so. When cryptocurrencies are tanking, all of the market is affected. The same can be said of stocks.
How much you've allocated to Bitcoin therefore has to do with your appetite for risk, and your interest in its upside down the line. And this point, for many, is what seals the deal for crypto investment.
Which asset has the greater long-term upside?
Nobody's going to argue with us when we say crypto has more long-term upside. But we'd also like to outline why gold's upside is not to be overlooked. Crypto has the most upside out of any asset class. It's barely a decade in, and it's an established financial market with a total market value of over $1 trillion.
For all the downside that's talked about in crypto, it's actually surprisingly limited. Bitcoin will still fulfill its function if it hits $300, as will many other tokens.
This is obviously a worst-case scenario for the crypto market. Any kind of best-case scenario involves the crypto market taking over finance and organically replacing fiat currencies.
How does gold compete with this? Amusingly enough, by doing exactly what it has so far. Over and over, crypto investors find that there is no guessing the market.
$65,000 BTC in short order from $13,000 was past any expectations. A top token in the form of Terra collapsing was, too, but in the other direction. It made crypto investors realize that, in this market, truly anything goes, and that lofty valuations won't change that.
Gold investors won't find themselves stuck in this process of exciting realizations. Years from now, physical gold will do pretty much what it has always done: act as a scarce store of value and, to some, a currency.
Being able to say this with certainty about an asset during times of unprecedented market turmoil tells us that gold's upside is just as significant.
Being able to bet on steady performance might not compare all that well to crypto's current upside, but it's something that will continue to propel gold investment decades from now.
