Gold vs Bitcoin in 2022

With inflation and geopolitical risks, people naturally look for stores of value. Is ‘digital gold" performing better than the original?

----------------

2022 has provided the perfect backdrop to test the Bitcoin claim to be digital gold.

• Inflation is at multi-decade highs – gold is a hedge against inflation
• Bank accounts have been frozen – havens needed from government overreach
• War has broken out in Europe – gold works when there are commodity shortages

Uncertainty

Gold has been the gold standard (pun intended) for safe-havens. But it has some drawbacks in the digital age. It's challenging to pay for anything, let alone digital assets like an NFT (Non-Fungible Token) with gold. Crypto has solved some of those problems and opened up a few others.

In this period of uncertainty, it's understandable that traders and investors will be looking to put their money someplace safe. Gold’s durability as a precious metal is the primary reason it is seen as the ultimate store of value- ie it is a physical, real thing. It's not a fiat piece of paper, nor ones and zeros on a computer. That said, most people investing in gold today are doing so electronically, which has its own pros and cons.

Inflation

Gold offers a hedge against price increases because it doesn't lose intrinsic value. However, that generally means it doesn't increase in value, either. This means it has relatively small moves in price when compared to cryptocurrencies (but bigger than some other assets).

Bitcoin has a significant amount of volatility. BTC's volatility is than that of gold. If an investor is trying to offset the risk of 7% annual inflation, it could be offset much faster from BTC rather than gold. But the risk is high. Most people investing in BTC are high-risk profile investors & traders seeking to make money on price swings. With the cost of credit expected to increase, there might be fewer high-risk funds available to keep pushing BTC higher.

Historical performance

When comparing Bitcoin and gold to assess which asset makes a better investment, BTC makes a killing. Since the digital currency's inception, one dollar invested in BTC would have a whopping portfolio size of $54.4 million. On the flip side, gold investors' portfolio size over the same timeframe would be at $1.83.

Having received a bad reputation from its enormous drops, Bitcoin is regarded as a highly speculative and risky investment. Regardless, several US companies have incorporated it in their balance sheets.

2022 performance

As the chart below shows, Bitcoin has underperformed gold by 16% since the start of 2022. However Bitcoin is much more volatile, and a -10% drop could be argued as relatively small when some major stock indices like Germany’s DAX are down by more.

Source: TradingView

The bottom line

Bitcoin might be an excellent long-term investment and even replace gold as a hedge. But, for now, the price remains too volatile to reasonably use it as a hedge against risk. It is, after all, one of the riskier trades around. There is still a chance the higher risk reaps a higher reward if investors change their opinion or diversify gold investments with Bitcoins.