Ink is spilling about bitcoin replacing gold. The launch of the ProShares Bitcoin Strategy ETF (BITO) on Tuesday and today’s debut of the Valkyrie Bitcoin Strategy ETF have some investors, such as Social Capital founder Chamath Palihapitiya, eager to declare that gold has been replaced.
The argument tends to go like so: Bitcoin is up 41% on the year, gold is down 10% over the same period. Both assets come in short supply and share the same hallmark of high liquidity. An increasing number of institutional investors are swapping out gold for bitcoin and discussing crypto assets as potential inflation hedges that can fulfill the same role that gold does in a portfolio.
There are some problems with all of this.
- Bitcoin might be up this year while gold has been negatively impacted by Fed messaging, but even with bitcoin’s colossal gains, it has a market capitalization of 1.1 trillion, well below gold’s, which sits north of 11 trillion.
- Though both bitcoin and gold have limited supply, bitcoin can be created — gold can’t. Though a finite amount of bitcoin exists right now, in theory an unlimited amount could be generated. This is not the case for gold.
- Bitcoin is bad for the environment. It uses an enormous amount of power to mine, to which cryptocurrency enthusiasts might say, “the same is true of gold mining.” The difference is that precious metals — including gold and silver — are needed for green technology. Mining of any kind does have an environmental cost, but gold miners are already looking at solutions. Bitcoin is, by nature, environmentally taxing and has little to contribute to a greener world. Precious metals might have a toll to extract, but that toll can be greatly diminished, and technology that is built off of the materials can reduce emissions by a greater amount than the cost of pulling those materials from the earth.
- Gold is a long-established international currency that can be safely traded. Bitcoin’s decentralized nature is an asset much of the time, but there are still vulnerabilities, and nightmare stories are not rare.
- We don’t know if cryptocurrency will be immune to inflation. Gold has plenty of historical data to point to, but cryptocurrency remains young and untested. Given its volatility, it may very well be vulnerable to inflation.
All of that said, it is easy to make the case that both cryptocurrency and gold have a place in the portfolio. Mad Money host Jim Kramer said, "Ultimately, I believe in both gold and crypto… and there’s no reason to look at these two things as any equivalent.” Kramer continued, “maybe when a crypto goes up, a store can go up in value, but when it goes down, it’s a big mistake. That’s not what I’m looking for in an insurance policy.”
Though lots of headlines about investors like Chamath Palihapitiya are framed to make it seem as though the investor class is pivoting to cryptocurrency, these articles often end with some interesting caveats. Palihapitiya invests in electric vehicles, for example, which require precious metals. He also invests in mining stocks, indicating that even crypto’s biggest cheerleaders still feel that there is value in metals.
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