Gold Or Bitcoin

 What’s the better store of wealth?

Gold has seen quite a surge in price lately, exceeding $2400 an ounce. Bitcoin at $70000 has almost returned to its all time high as well.

So there's definitely a big desire these days for alternative stores of wealth that aren't the U.S. dollar. This begs the question — which of the two is the better dollar alternative?

Gold's popularity

Let's talk about gold first. Gold is timeless and has been used as a store of wealth for millennia. There's actual physics based reasons that it's so popular:

• It's scarce.
• Its density makes it hard to fake.
• It has a distinct appearance (other rare metals like platinum and palladium tend to look a lot like silver).
• It doesn't tarnish like silver.
• It's not reactive so it won't randomly decay or combust.

It also helps that it's got a long monetary history from first being used directly as money (gold coins) to then being the asset backing the value of paper money (the gold standard).

To this day when a central bank decides that it doesn't want to hold too many dollars, the asset that it buys is gold because it knows that gold is instantly liquid, can't be printed, and has stood the test of time in terms of protecting wealth from the ravages of inflation and government shenanigans such as excessive debt.

In fact studies have shows that during times of true stress such as global war, gold is one the few assets that outperform. So in a way, it's a unique hedge that's more robust and battle tested than other diversifying assets such as fixed income.

One disadvantage (or is it an advantage?) of gold is that it can be quite sleepy and boring. Gold's price is never going to go to the moon. And while it can surge on occasion, especially when there are big shifts in monetary policy and the money supply, gold is not an asset that will probably ever double or triple in a few short months. If you're a gambler or a speculator chasing big volatility, you're bound to be disappointed.

Bitcoin: gambler's gold

And that's where Bitcoin comes in. Bitcoin has reached a degree of mainstream acceptance that many financial pundits would probably have thought impossible just seven years ago. The Bitcoin ETFs have opened up the cryptocurrency to all types of investors, including retirement funds like 401ks.

But why are people buying Bitcoin? Crypto bulls will say that's because it's the only truly free store of wealth that governments and financial institutions cannot tamper with.

But normal mom and pop investors would probably say something very different. They don't understand the benefits of and the innovation behind the blockchain. They've just heard of this Bitcoin thing that's tripled in price over the last two years and everyone seems to be buying it — so they too want a piece of the action.

It's volatility and the hope for a huge return that they're after. Thus, Bitcoin despite gaining significant mainstream acceptance over the past few years continues to be an instrument of speculation — where yes some purists hold it because it's an alternative store of wealth but most buy it (with weak hands) to gamble on its volatility. And when that volatility moves to the downside, those weak hands will panic sell.

It's a self fulfilling prophecy — assets that are prized for their volatility (i.e. the potential for big moves in price) will inevitable be bought up by speculators and gamblers, often with leverage, and thus continue to be highly volatile. That's because there's no real floor — when times are good price increases beget more price increases as everyone climbs aboard the hype train, but when times are bad, prices will keep crashing as panic selling triggers margin calls and more panic selling and forced sales.

Gold or Bitcoin?

Returning to the original question, you need to be honest with yourself. If you want a store of wealth to protect yourself from inflation and dollar devaluation, gold is the better and steadier choice.

If you're looking to speculate and possibly earn a big return with money that you can afford to lose, and stocks are not volatile enough for you, then Bitcoin would be an interesting thing to speculate on. Keep in mind that as more and more investors have embraced Bitcoin, its price moves have become more and more correlated with the stock market's. This means that Bitcoin won't diversify your other risky assets as these days it's governed by the same risk on and risk off cycle.

So be honest — are you trying to protect your money or gamble it? 

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