Gold funds vs cryptocurrencies: which is the new safe bet?

To help settle the ongoing debate, we look at the pros and cons of taking an old school investing approach with gold funds or putting cash into cryptocurrencies.  

Golds funds & cryptocurrency 

Gold as a store of value 

With the emergence and rapid price growth of Bitcoin and other digital tokens, a new breed of investors is looking to use cryptocurrencies as a store of value or a safe haven to hedge against inflation. Gold is seen as a safe haven and acted as a store of value, maintaining its purchasing power over thousands of years. 

Gold seems less interesting to some newer, younger, investing circles. They say it’s old news, a relic of the past.  

Is that really the case? Gold holds many characteristics that make in ideal store of value:  

  • It’s held intrinsic value since the dawn of human civilisation 
  • It’s scarce but in high demand  
  • It’s a physical, tangible asset with many different forms 

The precious metal is also no longer tied to currencies, nor is it pegged to the stock market either. That means gold can be used to hedge against fluctuations in currency markets and share prices.  

The consistency of the gold price is one of its biggest attributes where investors and traders are concerned.  

That’s not to say gold isn’t volatile in terms of its market pricing. Gold prices do fluctuate thus gold funds can go up or down in value. For instance, gold started 2021 at around $1,950. At the time of writing, the gold price was around $1,778.  

Comparatively though, gold can still be seen as a safe haven, protecting against inflation in particular. 

Storing value in Bitcoin 

Bitcoin is the most popular cryptocurrency and a bellwether for the market as a whole. It’s certainly the most valuable, currently trading at around $40,000 (as of May 20th, 2021).  

Because of its enormous per-token price, Bitcoin has been identified by some commentators, such as Citibank’s Tom Fitzpatrick, as “digital gold” – a place to store value in a digitally-led world.  Much like gold, the supply of Bitcoins is finite. Only 21 million tokens will be “mined”, or created via complex computational processes using blockchain tech. 

But we must stress volatility here. Bitcoin prices started 2021 at $34,000. It climbed to an all-time high of $64,000 in April 2021, before falling back below $30,000 in a sharp market crash on May 19th  

What’s interesting, though, is how the digital token’s use has changed. Bitcoin was originally conceived as an alternative to traditional fiat currency.  

Buyers could use the token to pay for goods and services, rather than using pounds, or euros, or dollars and so on. While Bitcoin can still be used as such, it’s massive per-token price means investors are increasingly buying it to hold onto, or HODL, than using it for its intended purpose. 

Of course, Bitcoin is not the only digital currency on the market. Ether, the token for the Ethereum blockchain, is the second most popular digital coin on the market. At the time of writing, Ether is trading at around $2,700.  

Unlike Bitcoin tough, Ether has a more practical use in the sense that transactions used on the Ethereum blockchain 

Other tokens like Ripple, Dogecoin, Dash, and Polkadot continue to draw investor/trader attention. However, they have yet to reach the price heights of Ether or Bitcoin. 

At the start of May 2021, the total cryptocurrency market was valued at $2.3 trillion. Gold’s total valuation is somewhere in the region of $11 trillion. 

Gold funds & cryptocurrency: head-to-head 

So, what are the pros and cons of putting your money into a gold fund or investing in digital currencies? 

Rarity 

As we established earlier, part of what fuels the gold price is its rarity. It’s a precious metal, and extraction levels have started to drop off. We may still be some way off peak gold, but the supply shrinks each year, unless a new major discovery occurs.  

Bitcoin is also in finite supply, and the algorithm through which new tokens are generated has been altered to make them even rarer. Not all cryptocurrencies have a maximum cap, but they often put a limit on the amount of coins mined per year. 

Inherent value 

Again, we touched on this earlier. Gold has always held value for many reasons. Its rarity combined with its practical uses means it is likely to stay in high demand. 

Cryptocurrencies’ value, in price terms, has risen massively since Bitcoin was first founded in 2009. Digital tokens are meant to be the next step in global currency. Their creators hope to see more people using them for everyday transactions. The true value of cryptocurrencies, and if they will even be used for this purpose, is yet to be seen.  

Some commentators like Bank of England Governor Andrew Bailey, believe cryptocurrencies have no inherent value, which puts off more traditionally minded investors from exploring digital currencies. 

Volatility 

On the price of gold is much less volatile than the price of cryptocurrencies, especially Bitcoin.  

There are some tokens called stablecoins, such as Tether, which are supposedly tied to the US dollar. These are thought to exhibit less volatility than their non-paired cousins, but these do not have the same massive per-token price tag as Bitcoin or Ether.  

Cryptocurrency price movements are also much more susceptible to market news and opinions. Even a tweet from the likes of Elon Musk can cause the price to skyrocket or tumble. Gold, while still having its own ups and downs, such as reacting to high government bond yields, does not move to the whims of markets quite so spectacularly. 

Availability  

Gold and cryptocurrencies are available to anyone who has the money.  

In terms of gold, it is available as both a physical product in a myriad of forms and a tradeable commodity on global exchanges. Gold ETFs are among the most popular ways for investors to access gold since it enables exposure to the metal without the requirement to take physical delivery and store it. 

There are no physical crypto tokens. They are an entirely digital asset. However, they can be bought via exchanges and kept in digital wallets, or tradeable with leverage via Contracts for Difference (CFDs). Gold CFDs are also available. 

Transparency, safety & legality 

Because of its long historical importance, gold has one of the most well-established tracking, authentication, weighing, and trading systems in the world. It is exceptionally difficult to forge or corrupt gold. It’s one of the reasons why gold is such a safe haven. 

Cryptocurrencies run on decentralised platforms. While that means they are accessible to anyone, there is no central governing body overseeing their creation and distribution.  

That being said, blockchain technology contains lots of encryption and complicated algorithms that makes it hard to hack and corrupt. But there have been some recent cases of exchanges collapsing and hundreds of millions of dollars’ worth of coins going missing.  

While institutional support is also rising for digital currencies, there is also major push back. Retail crypto trading is banned in the UK, for example. India and Turkey are also mulling bans. Wholesale acceptance is still some way off. 

Should you invest in gold funds or cryptocurrency? 

The jury is still out.  

Bitcoin and cryptocurrency have potential, but their inherent volatility plus regulatory woes may put off investors.  

Gold, on the other hand, represents surety and security. For the more cautious investor, a gold fund may be the way to go. 

In either case, investing and trading comes with risk of capital loss. You should only invest or trade if you can afford to take any losses.