Physical Gold vs. Bitcoin

As stores of value, gold and Bitcoin seem related to each other. Many investors view them as hedges against inflation, with cryptocurrencies sometimes dubbed “digital gold.”

But as you will see below, the differences between these assets can be substantial. One is not a direct substitute for the other. 

The purpose of this blog is to help you understand how these assets integrate into today’s financial landscape. We look at their historical performance, impact on portfolio diversification and future outlook. 

Key Comparisons

Category	Gold	Bitcoin
Historical Context	Millennia of use as a store of value	Emerged in 2009 as a digital-native asset
Volatility	Low	High
Market Cap and Liquidity	High market cap; highly liquid	Lower market cap; increasing liquidity
Store of Value	Proven track record as an inflation hedge	Potential as "digital gold"
Regulatory Environment	Well-established regulations globally	Evolving regulatory landscape
Technological Aspects	Physical asset; traditional storage	Blockchain technology; digital wallets

 

Investment Performance

The investment performance of gold has been exceptional over recent decades. Since 1971, gold has returned an average of 7.98% annually, climbing to 9.7% if considering the last 20 years in isolation. This performance reflects the declining value of fiat currencies, investors’ concerns about public and private debt, and the ongoing challenges of mining more of the metal. 

The average returns on Bitcoin have been even higher. During the last five years, the world’s most famous cryptocurrency returned 641.9%, or 49.3% annually. As such, the last ten years saw an astonishing 18,091.2% return, or 68.3% per year. 

That said, gold’s price has been substantially less volatile over its history than Bitcoin’s, raising its risk-adjusted return. Figures show that gold’s risk-adjusted return over the previous 20-year period is 66.9% with a maximum drawdown of -33.0%. 

Bitcoin’s risk-adjusted return, as measured by the Sharpe ratio (the ratio of return on investment to risk), is even higher. It is now 1.95 compared to gold’s 1.62, suggesting it is currently a better investment. However, it’s important to note that Bitcoin remains more volatile than gold.

Portfolio Diversification

Both gold and Bitcoin can assist with portfolio diversification. That’s because these assets have a low correlation with stocks and bonds, the bulk of most investment portfolios. 

For example, the correlation of minted gold with stocks over the last fifty years is just 0.004 – hardly any correlation at all. Furthermore, over 5-year periods, gold correlates in a way that favours investors. Data show that during bear and bull runs, the price of gold rises, making it ideal for investors who love risk-off investments.

The correlation between Bitcoin and stocks is more complicated. Sometimes Bitcoin moves with stocks, usually when institutional investors include it in their portfolio allocations. But it can also move counter to them when investor sentiment is low. As such, the range of correlations between cryptocurrency and equities ranges from 0.2 to -0.3. 

If you're interested in exploring a more stable comparison, check out our physical  gold vs gold ETFs article.

Future Outlook

Looking to the future, gold and Bitcoin have the potential to rise in value further. Both assets offer investors a haven and an alternative to conventional investment approaches. 

For example, economic uncertainty could push the demand for gold up if investors worry about what the future holds. They may view gold as a safe asset that protects them from the vicissitudes of the market. 

Gold prices could also rise if supply constraints continue. Mines may be unable to increase output, reducing the amount available to investors (and other market participants). 

Meanwhile, Bitcoin’s price could rise if the underlying technologies (such as the Lightning Network) improve, or institutions adopt it en masse. Halving events (which involve cutting new supplies) could also play a role. However, Bitcoin’s growing energy usage may prevent it from becoming practical for transactions in the future, undermining its role as an alternative currency to government fiat. 

Investor Considerations

So, what should you do as an investor when considering gold vs crypto? 

First, consider your risk tolerance. If you don’t mind massive gyrations in price, then Bitcoin could be the better option. However, if you prefer less volatility, gold is the better option. 

You also want to think about storage when considering gold or Bitcoin for your portfolio. Both require you to take security seriously, but physical gold is arguably more challenging to secure yourself. 

Lastly, accessibility and ease of trading could be concerns. Gold coins, tablets and bars require you to physically transport them to a broker before you can sell, while you can trade bitcoin on apps or via online exchanges with the click of a button. 

Conclusion

While gold and Bitcoin are stores of value and hedges against inflation, there are considerable differences between them. In terms of the gold vs Bitcoin market cap, there is considerable variation. Gold’s total market cap is around $18 trillion while Bitcoin’s is only around $1 to $1.5 trillion. 

Gold and Bitcoin’s correlation with other assets also differs. The former has a low correlation over long-time scales, while the latter chops and changes more. 

As such, which you choose depends very much on your goals and risk tolerance. Bitcoin may have a higher risk-adjusted return over the last ten years, but gold could come surging back as the former matures as an asset class.