Gold Versus Bitcoin: What’s the Better “Defensive” Investment?

On August 5, 2024, the U.S. stock market plunged over 1,000 points as measured by the Dow Jones Industrial Index. Investors were spooked over Japanese currency volatility and economic volatility at home as inflation rose and U.S. debt levels skyrocketed ahead of a massive presidential election.

Fortunately, the stock market recovered within 24 hours and finished the month of August up moderately, alleviating worries about the markets and the economy – for now.

That 24-hour period between August 5th and 6th was instructive for future market selloffs, as it was the first time defense-minded investors could choose between two intriguing alternative market options—gold versus cryptocurrencies (mostly Bitcoin)—to hedge against severe stock market chaos.

The distinction between gold and cryptocurrencies could not be clearer. The former is a physical asset historically the first port of call for anxious stock market mavens. The latter is a digital asset that doesn’t track the stock market and is favored by investors seeking creative (and autonomous) portfolio instruments.

Increasingly, Wall Street chatter focusing on gold or cryptocurrencies as a viable alternative to stocks has reached mainstream investors in 2024. It’s a relatively new phenomenon for Main Street investors, but it’s real nevertheless, and data on those discussions and engagements is beginning to show up.

A case in point – one recent study from CyberMetals concluded that 63% of investors prefer physical assets in major stock market selloffs. In times of higher market volatility, that gap widens, the report notes – in that scenario, 80% of investors would opt for gold over Bitcoin.

Yet data also shows that market interest in cryptocurrencies is growing faster than gold. Interest in crypto exchange-traded funds skyrocketed after the U.S. government regulators okayed Bitcoin and Ethereum ETFs in January 2024.

So what’s the better investment alternative to stocks – gold or bitcoin? Let’s give the floor to investment experts and see what they land on a growing and impactful issue in 2024.

Gold Versus Bitcoin: 2024 Year-to-Date

Gold is up 22.5% from the beginning of the year. The 52-week intraday high reached $2,539 on Aug. 27, 2024.

Bitcoin is up 42% in 2024 on a year-to-date basis, with BTC priced at about $60,000 as of August 27, 2024.

Laying the Groundwork

Whether to invest in alternative assets like gold or cryptocurrencies depends on individual risk tolerance, investment goals, and market conditions.

“For example, some investors who are comfortable with higher levels of risk might be more inclined to consider alternative investments,” says Kimberly Rosales, CEO of ChainMyne, a fintech company focusing on blockchain technology and global payments. “Cryptocurrencies, in particular, are known for their volatility.”

Rosales says it’s understandable that investors want to protect their wealth against inflation or market downturns, and gold or cryptocurrencies are highly viable options right now.

“However, it’s important to remember that these assets can also experience significant price fluctuations,” Rosales notes. “It’s essential for Main Street investors to conduct thorough research and consider consulting with a financial advisor before making any investment decisions. They should carefully evaluate the risks and potential rewards associated with alternative investments and ensure they align with their overall financial goals.”

Why No Bonds or Cash?

Discerning investors may wonder why worry about gold or Bitcoin when you have historically proven defensive assets like bonds or cash when stocks go awry. But that tactic may be oversold (literally) these days.

“The “cash position” you’re holding your portfolio in is US dollars,” notes Brandon Thor,
Founder and CEO of Thor Metals Group in Beverly Hills, Cal. “Currently, the US dollar is in peril, and when the dollar is fully devalued, you may have, for example, $500,000 in cash in your investment portfolio.”

“The problem will be that 500,000 dollars only buys you the equivalent of 150,000 dollars’ worth of goods/services in today’s dollar,” he says.

Bonds are in similar dire straits, Thor says.

“It’s generally accepted that bonds tend to do poorly when interest rates rise and tend to perform well when interest rates drop,” he notes. “If interest rates are rising, you’d have been better off investing in a bond at that higher interest rate (rate of return). If interest rates are falling, you are at least getting a rate of return at all, given the rates are getting lower and thus returning less.”

Given inflation, Thor says it’s “simply impossible” to meaningfully lower rates or continuously lower rates without the dollar completely cratering to levels only recently seen in Venezuela with the Bolivar, Argentina at the turn of this century, and other similar massive currency devaluations.

“In that regard, the short answer is that bonds do not look appealing going forward,” he adds.

Gold Is Likely a Better “Defense” Call Than Bitcoin – For Now

Investors often mistakenly view Bitcoin as the “new gold” when choosing between gold and silver. Thor says this is not the case.

He says Bitcoin has major issues going against it as a stock market hedge.

— “Bitcoin is aggressive, used by most as a means to make a profit as opposed to protect against loss,” Thor notes.

— It has a short track record, less than two decades long.

— It’s speculative and has historically demonstrated wildly volatile short-term ebbs and flows.

“It’s a major error to view cryptocurrency as being like gold,” Thor says. “Cryptocurrency is very speculative. It has the potential for substantial gains but doesn’t possess the track record to really serve as a safe haven during uncertain times like we are experiencing right now.”

On the other hand, physical gold is arguably the most dynamic safe haven and most effective weapon against the threats to one’s wealth, Thor adds.

“That’s why gold, at the present moment, should be a defensive cornerstone of one’s portfolio,” he notes. “We don’t have the luxury to make highly volatile and speculative investments when making wealth preservation decisions, and gold allows us to avoid that scenario.”

That’s not to say one shouldn’t invest in gold or cryptos in any market environment. Thor expects gold and Bitcoin to see price increases in the coming years as economic uncertainty amplifies.

“Bitcoin will see upward price movement if either a major credibility-building event occurs (such as a country’s government choosing to hold Bitcoin as a reserve) or if gold’s availability diminishes,” he says. “Gold will rise as market volatility bumps along.”

It’s also worth noting there’s only a finite supply of gold on the planet, and central banks and institutional investors already hold the vast majority of it and don’t intend to sell it. “Thus, there will be a level of demand at which gold’s availability will drastically decrease,” Thor notes. “If that “credibility crisis” occurs, Bitcoin can be seen as a means to achieve the same purpose as gold, that purpose being to get one’s wealth out of fiat currency.”

Bitcoin deserves a spot in your portfolio

Cryptocurrency, especially Bitcoin, with its lack of track record and highly speculative nature, isn’t a protective investment option, but it does have a place in most Main Street investment portfolios. “Bitcoin can be a solid choice once we no longer find ourselves in a tornado of market uncertainty,” Thor adds.

Other asset experts agree, noting that Bitcoin represents a growing investment class that deserves attention – at all times.

“Crypto as a whole has been a game changer as many investors have made millions of dollars and also lost millions in recent years,” says Miraj Ladwa, director at Bullion Giant in Manchester, UK. “It’s a highly volatile market, with only about 21 million Bitcoin owners.”

While Ladwa prefers gold as a defensive hedge due to its “touch, hold, feel,” he agrees there is room for both gold and bitcoin in a Main Street investor’s market portfolio.

“Keeping a diverse portfolio is key, and gold and cryptos help,” he says. “Just remember that cryptocurrency’s risk is much higher as the market is extremely volatile.”

As for gold, a moderate portfolio position is always a good idea.

“My outlook on gold as a portfolio hedge is positive right now, but I wouldn’t allocate more than five percent of a portfolio towards it,” says Michael Collin, CEO at WinCap Financial in Winchester, Mass. “Gold has historically been seen as a safe haven during economic uncertainty or inflationary pressure.”

With global central banks continuing to inject liquidity into the economy and mounting debt levels, Collins believes that gold should serve as a “valuable hedge” against potential inflation and currency devaluation in tough times ahead.