By Tyler Gallagher, CEO and Founder of Regal Assets, an international alternative assets firm with offices in Beverly Hills, Toronto, London and Dubai.
Entrepreneurs and business owners need to diversify their income streams and investment portfolios if they want to create a lasting enterprise that can withstand market and currency shocks. During economic downturns, the historical go-to diversifier has always been gold and precious metals.
Time and again, research has shown that gold holds its value exceptionally well during recessions. This is particularly true of the 2007-2009 financial crisis, when the cumulative performance of gold was 19% while the U.S. equities market fell 35%.
If your business is hit hard during a recession or market crash, gold can bail you out. But lately, the meteoric rise of cryptocurrency has sparked interest in it as the inflation hedge of tomorrow and the eventual successor to gold.
As the founder of an alternative investment company, clients now more than ever are asking me about the future of gold and whether bitcoin may eventually replace it. That’s why I’ve decided to finally share my thoughts on why I believe bitcoin is here to stay but won’t be able to replace gold as the world’s reserve asset — at least not anytime soon.
Gold And Bitcoin: Competitors Or Complements?
Bitcoin and other cryptocurrencies have recently captured the attention of institutional investors looking for the next generation’s disaster hedge. Institutions and retail investors are now flocking to the digital asset class in unprecedented numbers — between Q3 and Q4 2020, the average institutional investment in the world’s largest crypto fund skyrocketed from $2.9 to $6.8 million. In December alone, the price of bitcoin (BTC) rose 47%.
Although JPMorgan Chase recently opined that “Bitcoin’s competition with gold has already started,” there’s little evidence to suggest that the success of one asset (BTC) means the phasing out of another (gold).
Demographic trends confirm that the tide is turning, with many younger investors preferring digital assets over metals. For example, only 7.5% of millennials aged 25-34 own gold and silver, while among affluent millennials, 25% own cryptocurrency (and 31% are interested in acquiring it).
While it’s true that some retail investors are warming up to cryptocurrencies, institutional investors aren’t turning their backs on gold. For example, in the second half of 2020, Warren Buffett’s investment firm took a $565-million long position in Barrick Gold. In the previous quarter, Ray Dalio’s Bridgewater & Associates bought a $400 million stake.
The Case For A Dual Hedge
It’s not entirely true that gold and cryptocurrencies serve the same purpose. Though they’re both stores of value that could provide a safety net against inflation risk, their use cases are dissimilar. On one hand, gold bullion can be utilized in the manufacturing of jewelry and electronics. On the other, bitcoin can facilitate instant cross-border payments and remittances without restriction from central authorities.
Therefore, when we zoom out and view the two assets from a microeconomic lens, it’s clear that the two assets are functionally distinct. But, given that neither is closely tied to the value of the U.S. dollar, it’s likely that both will continue to serve as important hedging tools as corporate treasury assets.
On the retail side, it’s clear that youth favors crypto over gold. Still, there are numerous advantages that, at this point, gold poses over cryptocurrencies as a store of value and medium of exchange. These benefits make it hard to believe that gold will ever lose its luster for individual retirement investors, including:
• Long-term price stability.
• Secure storage in vaults.
• Custodian oversight of gold or silver individual retirement accounts.
• Real-world industrial utility.
• Proven longevity over millennia.
At the same time, bitcoin and altcoins are just now coming of age after a tumultuous 12-year maturation period. Bitcoin is more than “millennials’ gold.” Rather, it’s a resilient, peer-to-peer payment network and store of value that deserves recognition alongside, rather than in opposition to, gold and silver.
Gold Versus Crypto: Consider Betting On Both In 2021
In short, I’m bullish on both gold and bitcoin in the year ahead and, to date, there aren’t any signals in the market that indicate that either asset is going away any time soon. Both the yellow metal and BTC serve similar speculative functions but have vastly different individual properties and use cases, which makes them complementary investments rather than competitors.
Although more institutional money will likely flock to BTC in the year ahead, this doesn’t pose an existential threat to gold. Not anytime soon, at least. It’s more likely that we’ll see gold and BTC become tandem hedges with prices that become closely correlated. In other words, it seems that we’re staring down a future with two major inflation hedges rather than one.
If you’re an entrepreneur, perhaps the worst thing you can do is sit on nothing but cash savings. To protect your business in the event of large-scale inflation, consider diversifying with assets that aren’t correlated with the U.S. dollar, such as bitcoin and gold, in 2021.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.