Will Bitcoin Overtake Gold As A Hedge?

Investment 101

Published: November 9, 2021


If you’re looking to put your money into an alternative investment vehicle to protect you against soaring inflation rates, you’ve probably already considered Bitcoin and gold as options. While both assets make a good hedge against the dollar, gold has historically been the best long-term hedge. 

As markets continue to fluctuate, some investors are starting to wonder if Bitcoin could overtake gold as the best long-term hedge play. The short answer is probably not. 

While Bitcoin has had some terrific success over the past decade, it has only been around for a short period of time, especially in comparison to gold. In fact, some financial experts question whether cryptocurrencies are inflation hedges at all. 

If you’re reading this article, though, you’re probably looking for a little more information than that, so read on as we break down the key points of Bitcoin vs. gold as an inflation hedge.  

What is an Inflation Hedge?

When you see an investment referred to as a “hedge,” that means it is an investment that can offset something else, such as an adverse price movement. Investors use hedging to limit risk within their financial assets. 

An inflation hedge is an investment that can protect you against inflation. In basic terms, inflation is when the price of goods rises, resulting in a decline in purchasing power. As a result, when you hold money over many years, its inherent value will decrease because the cost of goods will increase. 

Investing in an inflation hedge can help your money maintain its value through periods of inflation. Different investment products can hedge against inflation in different ways. 

For example, some investments may increase in value with the rate of inflation, ensuring your money holds its value. Alternatively, some investments may resist inflation, increasing in value when other assets lose value, providing more stability within your portfolio. 

Many people see gold and Bitcoin as hedges against inflation. However, Bitcoin is a relatively new product, and investors are still examining its long-term stability. Meanwhile, gold has been known as an inflation hedge for some time. 

BONUS: Watch The First Video In Our Inflation Youtube Series

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Key Differences Between Gold and Bitcoin

Gold and Bitcoin are both forms of alternative investments, and they offer many unique qualities compared to products like stocks, bonds, and funds. However, these investments have a few key differences aside from their ability to hedge against inflation. Understanding these differences can help you make a more informed decision about your next investment. 

Here are the most significant differences between gold and Bitcoin as investment products. 

Gold & Bitcoin Are Regulated Differently

When you invest in any asset, you must ensure that it is authentic and legitimate. As a result, the asset you choose should have a reliable regulation system. 

Gold and Bitcoin have different methods and requirements for regulation. Gold has been bought and sold internationally as a regulated asset in one way or another since the 1800s. In most cases, you will need to purchase gold from a registered dealer, who is bound to specific rules and regulations regarding purity, pricing, and transparency. 

In contrast, Bitcoin does not yet have the same reliable regulatory infrastructure as gold. Since Bitcoin is so new in the grand scheme of things, the regulatory landscape is constantly evolving, especially from country to country. 

Asset Liquidity Differences

Gold and Bitcoin also have different levels of liquidity. Liquidity is the ability to convert an asset into cash without impacting its market price. 

Bitcoin and other cryptocurrencies tend to be relatively liquid assets. However, cryptocurrency exchanges have regulations about how much you can liquidate daily. So if you want to cash out all of your crypto investments quickly, you may need to spread your liquidation across several days, slowing the process. 

As a result, if you only own a small number of cryptocurrencies, they may be a fairly liquid investment for you. However, if you treat Bitcoin as your primary investment vehicle, you’ll need to consider the liquidation limits for your specific exchange. 

In contrast, gold is a relatively liquid asset. Since gold is a physical asset, finding a buyer can be much easier. In addition to gold exchanges and markets, you can almost always sell your gold to jewelry stores, pawn shops, coin shops, and other businesses that deal in precious metals.

Many gold investment platforms even offer to buy the gold back from their clients, making the liquidation process easy. You can also take your physical gold to local buyers or sell it online. However, you risk being scammed when you sell your gold in person. 

One hindrance to the liquidity of gold is its storage method. If you keep your gold at home, you can easily retrieve it and sell it when you’re ready. However, if you store it in a storage facility several states away, you won’t be able to retrieve it as quickly. 

While gold and Bitcoin can both be liquid investments, your specific investing situation can impact their liquidity. 

The Volatility of Each Asset

An asset’s volatility is its tendency to change prices unpredictably. Almost every investment has at least some level of volatility. However, with Bitcoin’s major price swings over the past several years, it is a more volatile asset than gold. 

Bitcoin’s price also tends to be significantly influenced by the media and talking heads. This effect has historically caused investors to panic buy and sell Bitcoin, creating periods of increased volatility. 

Other cryptocurrencies, such as Tether tokens, are less volatile than Bitcoin. However, Bitcoin’s volatility may decrease as global markets and traditional investors become more accustomed to cryptocurrencies. 

Meanwhile, for the most part, the price of gold has maintained its value over time. As a result, if you plan to hold a gold investment long-term, you can expect its value to remain relatively stable. 

However, as with any investment product, the gold price fluctuates in the short term. If you ever need to sell your gold investment quickly, you risk barely breaking even or losing money on your investment. However, experts can usually predict changes in the price of gold due to supply and demand and other outstanding factors. 

Utility & Ease Of Use

One of the reasons gold has been able to maintain its value over time is its utility. This material is used in many applications, including:

  • Currency
  • Jewelry
  • Luxury items
  • Electronics
  • Dentistry
  • Aerospace

Gold has an inherent value, and its utility will remain throughout time. 

In contrast, Bitcoin’s only utility is as a digital currency and an investment. However, its utility may increase with the introduction of decentralized finance, allowing people to use it in financial transactions.

With decentralized finance, Bitcoin may hold more purpose in various personal finance uses. However, currently, gold has more utility than Bitcoin. 

Finally, gold simply makes more sense than Bitcoin to many people. This is because the concept of buying and selling gold is relatively simple. Meanwhile, investing in cryptocurrencies has a reputation for being more complicated and skill-driven. 

Considerations When Making A Hedge Investment

While many people consider gold a better hedge against inflation than Bitcoin, this doesn’t mean that Bitcoin is necessarily a bad choice for your portfolio. While gold is a safer, long-term investment, many investors are less risk-averse and interested in higher potential returns.

Here are a few factors to consider when determining which investment vehicle to use as an inflation hedge. 

History as an Inflation Hedge

One way to predict an investment’s performance is to examine its history. While performance can vary significantly, if an asset has historically increased in value with inflation, you may feel more confident that it will continue to do so. 

Over time, gold has undoubtedly been a more reliable hedge against inflation. People have invested in gold in one way or another for thousands of years. In that time, it has maintained a relatively stable value even in the face of inflation.

Meanwhile, Bitcoin has a much shorter investment history, as it has only been around since 2009. As a result, this product has a less reliable history as an inflation hedge.

However, the value of Bitcoin plummeted in 2022, which shows that the asset failed to maintain its value during at least one period of significant inflation. 

Effectiveness as an Inflation Hedge

Gold tends to be a reliable hedge against inflation. This commodity mainly acts as an inflation hedge because its price tends to increase with inflation. In other words, when you purchase gold, hold it for ten years, then sell it, its new price may reflect the inflation rate across those ten years.

However, inflation isn’t the only factor impacting the price of gold. Demand also drives gold’s value. As a result, when more people begin using gold as an inflation hedge, the demand increases, causing the price to soar. 

Because gold has such a widespread presence within jewelry, the jewelry market can also impact gold’s value. For example, gold goes through periods of higher and lower popularity within the jewelry market. 

Still, with these factors, gold has proven an effective hedge against inflation. Numerous financial experts consider gold and other precious metals to be some of the best inflation hedges overall. 

Meanwhile, there is not as much data about Bitcoin’s effectiveness as an inflation hedge. As a result, investment experts can’t say for sure whether this asset will reliably perform well in periods of inflation.

However, we can look at Bitcoin’s fluctuation in value during one of the worst periods of inflation in recent history. 2022 had the highest inflation rate change in 40 years, but Bitcoin lost close to 58% of its value in the second quarter of the year. This evidence suggests that Bitcoin is not currently a reliable inflation hedge. 

Still, more data is necessary to determine Bitcoin’s ability to hedge against inflation. 

Gold and Bitcoin’s Accessibility

When you purchase an investment vehicle to hedge against inflation, you probably want it to be relatively accessible. Inflation rates can change unpredictably, and you shouldn’t need to jump through too many hoops to add an investment to your portfolio and sell it when you need to. 

Gold and Bitcoin are both accessible assets. You can easily purchase and sell both of these products through several different methods. However, gold may be slightly easier to invest in than Bitcoin.

Gold has a well-established market presence. You can purchase this asset online or in person at a local dealer. You can also invest in gold in different ways, such as through an ETF or self-directed IRA that holds physical gold. 

However, when you purchase physical gold, you need to consider logistical details like storage and shipping. For example, storing your gold in your house may not be very secure; instead, you will probably want to hold it in a certified storage facility. In addition, if you purchase the physical gold online, you’ll need to pay for reliable tracking and protection during shipping. 

Meanwhile, you can easily purchase Bitcoin through several crypto exchanges and brokers. However, these custodians typically hold on to the coins for you. If you want to take custody of your Bitcoin, you’ll need to look for a unique cryptocurrency exchange that allows personal holdings or holds your coins in a trust. 

Bitcoin may also be cheaper than gold, as crypto exchanges tend to charge fewer fees than gold custodians. However, you may owe higher commissions if you trade Bitcoin frequently. 

Altogether, Bitcoin and gold are both easy to buy and sell. The option that is more accessible for you depends on your specific situation.

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Protect Your Assets Against the Future and Diversify Your Portfolio with a Gold IRA

In our opinion, the choice is pretty clear. If you’re looking for a safe, long-term hedge against inflation, you want to invest in gold. Gold is proven to hold its value through bear and bull markets, even when inflation is decimating the power of the dollar. 

While you can buy gold bars and gold coins to store at home, a tax-advantaged gold IRA is one of the best ways to invest in gold. When you invest in a gold-backed IRA, you own your assets like a traditional gold investment. However, as the value of your gold continues to grow, you won’t be taxed on the profits you earn over time through compound interest. 

If you’re interested in starting a precious metals IRA, Noble Gold Investments offers several options, including a gold IRA, silver IRA, and even palladium and platinum-backed IRAs. If you’re interested in learning more about purchasing gold in an IRA, give us a call at 877-646-5347. Our team is standing by to answer any questions you may have about diversifying your portfolio and hedging against inflation with gold.

Investment 101