One of the primary principles for investing, is to hedge yourself from unpredictable events such as currency collapses. The main way to accomplish this is the theory, not “putting all your eggs in one basket”. Protecting your investment during times of crisis is one of the most important skills to have in investment. Whenever some natural, financial or political disaster occurs, gold has traditionally been one of the best safe harbors for one’s resources. Traditionally, Gold and other precious metals have been one of the ways of hedging against risks. However, in recent times, with the introduction of cybercurrencies such as Bitcoin, there is now a potentially more attractive investment available. Both of them have their intrinsic advantages for hedging against market risk, which will discuss below.
To begin with, Gold definitely has history on its side. The amount of Gold is limited by the amount which is extracted from the ground. During time of turmoil, those that had gold, were able to save their money. However, recently Gold has not been as stable as it has been historically. It has been very volatile due to the volume of which it is being traded. However, due to the securitazation, small amounts of gold can be sold are very small, and make the trading more frequent than before. However, it this depends on the priority of the investor. Is it stability — the preservation of capital or are they looking for high returns and willing to accept the high risks that come with it. Currently, if preservation of capital is the priority, gold and other precious metals are the slightly better choice while Bitcoin can offer much higher returns.
For Example, David Andolfatto of VP Fed Bank of St-Louis sees Bitcoin becoming the next safe asset, saying:
Is Bitcoin a safe asset? You’re probably thinking no, of course not. The dollar price of bitcoin can be quite volatile. One can easily gain or lose 50% over a very short period of time. So if we’re talking about an asset that offers a stable rate of return, Bitcoin ain’t it.
To explain further, while Cryptocurrency has value due to the fact that its amount is limited. Bitcoin is limited at 21 million so unlike Fiat currency, no more of it can be minted. Recently, the performance of Bitcoin has been amazing. Unfortunately, some countries have made it illegal to use cryptocurrency to actually use Bitcoin for purchasing goods and services. There have also been many security risks associated with trading Bitcoin as it is not a traditional financial instrument and as a result, there is a risk of of unscrupulous providers who may simply take money without providing the service.
The argument against Bitcoin and other cybercurrencies is that it has not intrinsic value, as it is not backed by any assets and only has value as long as people perceive that it has value. This is very similar to the problem that Fiat currencies face. According to Tom Vays of LiberyLifeTrail.com, Bitcoin is the new Digital Gold as it has a very high price volatility risk but also does not have any kind of ceiling so the potential for growth is enormous. On the other hand, gold has not outperformed the stock market in 30 year periods as it does not account for any technological innovations.
Another big problem with gold is that it has a huge political risk as authorities can confiscate it from any vault and as Gold Money recently found out, there is too much regulation preventing the creation of a gold-based payment system. This happened in the United States in the 1930’s during the New Deal, implemented by President Franklin Roosevelt, which include the seizure of all Gold reserves in order to turn the dollar into a fiat currency.
All in all, Cybercurrency seems to be the more promising investment for the 21st Century due to the inherent limitations of Gold as it has much higher growth potential.