Every financial advisor knows someone who's a gold bug. Folks who distrust the government, eschew paper assets and fear inflation wrought by monetary and political instability. They want to hold their money — and besides, gold is pretty to look at.
But is gold soooo 20th century? Many say gold needs to step aside. There's a new "digital gold" in town, and its name is Bitcoin.
So. You have clients who own gold. You might even have the SPDR Gold ETF in your portfolios. Should you be recommending that your clients sell gold and buy Bitcoin?
Let's start with the case for gold.
People offer many reasons justifying their ownership of this asset, including:
- Gold has been a store of value for 5,000 years — offering confidence other assets can't match.
- Gold protects against currency deflation, geopolitical uncertainty and product-price inflation.
- Gold is a real physical asset — not a paper representation of an asset like money.
- Gold has many commercial uses. It is inert; doesn't tarnish or corrode; requires no lubrication, maintenance or repair; and can be melted and easily made into wire, hammered into micro-thin sheets or alloyed with other metals. It conducts electricity and is nonallergenic. Because of its beauty and luster, gold is most frequently used in jewelry. But it's used in electronics, the space program and health care (including dentistry and treatment for rheumatoid arthritis and cancer). It has long connoted excellence — Olympic medals, the Oscars and Grammy awards are plated with gold.
- Supply and demand: Gold mining has been declining since 2000 while demand has grown. This supports the thesis that the price will rise.
- Gold is not positively correlated to stocks or bonds, making it an excellent addition for portfolio diversification.
- There are many ways to buy gold — bullion, gold coins, stocks of gold mining companies, gold futures contracts and gold ETFs.
Nonsense, say Bitcoin proponents. They note that gold's history is irrelevant; it's the future that counts. Also, gold's performance against inflation, deflation and the dollar is iffy at best — and when the world collapses, it won't be gold you want but bullets and whiskey. As for being a physical asset, a million dollars is about 35 pounds of gold. Try lugging that around all day.
They also note that gold dealers, prices and fees are not regulated, and while you can choose securities, many (such as gold mining stocks) often deviate from the metal's price. Because gold never vanishes or expires, its supply grows every year — meaning rising demand is needed just to prevent prices from collapsing.
Bitcoin, by contrast, is the only truly noncorrelated asset class providing outstanding benefits to portfolio diversification (improved returns with lower risk).
As a digital asset, it is the most convenient asset to own — accessible via the internet anytime, anywhere. The Bitcoin network has never been hacked, giving investors a high degree of confidence, and there are thousands of commercial uses — transforming every element of commerce on a global scale.
All this leads many to conclude that Bitcoin and blockchain, the underlying technology built to create bitcoin, are the most revolutionary technological innovations since the internet itself. In fact, many call Bitcoin "Internet 3.0" — whereas the original internet connected people (think Facebook) and Internet 2.0 connected things (Bluetooth), Internet 3.0 connects money (Bitcoin).
Yet the most compelling argument of all is the fact that Bitcoin's supply is truly fixed, unlike that of gold. Only 21 million Bitcoins will ever be produced — a fixed supply in the face of sharply rising demand. In its early days, only individuals bought Bitcoin.
