“It’s not for me to say Bitcoin is good or bad,” he says. “Bitcoin is not a threat to gold because it does different things. If you have gold in your portfolio, between 5 and 10 percent, it increases your risk-adjusted returns, protects you against shocks, negates market falls and is a true diversification agent.
“If you had bitcoin in your portfolio over the last five years, it did very well, but it hasn’t been a means of diversification. This significantly increases your risk, especially stock risk, which is like doubling down on your tech stocks or buying the Nasdaq with leverage.
“This was demonstrated perfectly when the Fed started raising rates in 2022, tech stocks were crushed, and bitcoin was slapped. So I do not consider Bitcoin to be a competitor to gold. »
Bitcoin was invented in 2009 to leverage blockchain technology to purchase goods and services via online transfers without the need for a bank account.
However, this quickly escalated into a synthetic asset price bubble fostered by a hodgepodge of stakeholders who organized on social media and the internet.
This has helped it skyrocket gold’s returns over the past 14 years and its supporters believe its capped supply of 21 million coins means its value will continue to rise faster than that of gold.
But Yermack says these assumptions are based on historical price developments, rather than academic or mathematical fundamentals.
“Whether bitcoin proves to be a better investment than gold in the future is really anyone’s guess,” he says. “No asset has fundamental properties such as cash flows or property rights attached to it, so their values are based on pure investor speculation.”
A golden reflex
Other US academics, including Wharton Professor Jeremy Siegel, insist that “Bitcoin is the new gold for Millennials”, who see it as a superior hedge against central bank money printing and inflation . peaked at 7.8 percent in the last quarter of 2022.
The view that Bitcoin functions as a hedge against inflation is shared by Adrian Przelozny, founder of crypto exchange Independent Reserve. He says bitcoin will create long-term value for investors because of its fixed supply, although its wild price fluctuations mean it is unlikely to function as money.
“The volatility of Bitcoin is much higher than that of gold, but it decreases over time and will probably start acting like a commodity in the next 10 or 15 years,” says Przelozny. “There is also a halving of Bitcoin supply around next May and we are optimistic that this will support prices.”
However, gold strategist Read insists that investors need to understand that gold and bitcoin play different roles in potential wealth creation depending on the investor’s goals.
The strategist also advises against buying gold in knee-jerk reaction to headlines about geopolitical conflicts like in Israel.
“Typically what happens during a geopolitical event is gold spikes, and then in the next period when the world doesn’t end, gold falls back,” he says .
“The only people who buy on shock events are those who cover short sales (betting on falling prices) and agile traders who want to profit from very short-term movements in gold. But generally speaking, I say that geopolitical conflicts are not a reason to buy gold, but rather a demonstration of why gold should have been in your portfolio in the first place, because it protects against unforeseen circumstances.”
Reade adds that he is confident that gold’s defensive qualities for conservative, long-term investors will shine through as central banks cut interest rates within 24 months.
“The next big change in direction of interest rates will be a decline for several reasons,” he says. “The U.S. could achieve a soft landing with somewhat higher unemployment and lower inflation, leading to lower rates. Either the US could fall into recession and rates would fall faster, or we could be facing some kind of financial crisis, in which case rates would fall faster than expected, which would be really good for gold .
Today, the sum of all gold reserves stands at $12.3 trillion ($19.2 trillion), with the metal owned by investors for thousands of years due to its status as a store of value can also be used for decorative purposes.
Bitcoin, on the other hand, has reached a market value of $588 billion in just 14 years since its invention as a decentralized form of money by pseudonymous founder Satoshi Nakamoto.
Cryptocurrency is favored by young investors who are avoiding the risk of capital loss to adopt investments fueled by the two major trends of the 21st century: the Internet and social media.
Older investors – who often manage larger amounts of capital – tend to prefer the safety of gold as a safe-haven physical asset, whose value rarely plummets like Bitcoin.