The Federal Reserve recently announced another 0.75% rate hike, which sent the stock market predictably lower. Higher borrowing costs are eating away at corporate profits, driving down stock prices and sending investors to the alternative investment market. Lately, gold and cryptocurrencies have been two strong alternative investments. This begs the question, which one is better?
Why are alternative investments popular during market downturns?
Alternative investments have always been popular with much of the investment community. This is largely because many alternative investments have shown an ability to perform and generate wealth regardless of stock market performance. It stands to reason that when the stock market crashes or undergoes a market correction, an even larger segment of the investment community becomes interested in alternative investments.
Gold against cryptocurrency
For many investors, the battle of gold against cryptocurrency is a matter of perspective. Gold has been a recognized champion of alternative investments for decades due to its consistent ability to generate returns when the stock market drops or inflation eats away at the value of paper money. Cryptocurrencies, on the other hand, are the new kid on the block.
Led by Bitcoin, the crypto burst onto the market just over a decade ago and took off like a rocket. Cryptocurrency investors hailed it as the wave of the future, and it looked like they were right when Bitcoin hit an all-time high of $65,000 in September 2021. Sadly, the past 12 months have been disastrous. Many cryptocurrencies, including Bitcoin, have been in freefall for most of 2022.
Many crypto exchanges have collapsed and Bitcoin is trading at $18,838.00. That means it’s down about 60% from September 2021, which is considered absolute obliteration. When Bitcoin peaked in 2021, professional athletes like Odell Beckham Jr. took all their salaries in Bitcoin. The net effect of this was to throw about two-thirds of his estimated $750,000 pre-tax earnings down the chimney.
After taxes were taken from his salary, Beckham’s cryptocurrency bet earned him around $35,000. All told, that’s a loss of $720,000.
The resurgence of the dollar has caused the price of gold to fall from around $1,900 per ounce in September 2021 to around $1,670 per ounce today. However, even by this metric, Beckham would have given back around 10% of his pre-tax earnings compared to nearly 70%.
The other difference is that if Beckham had bought gold instead of Bitcoin, he would still have a physical asset that has proven its ability to perform for investors for centuries. There is no guarantee that cryptocurrency will even be here in 10 years, let alone 100. In contrast, an ounce of gold that sold for $371.83 100 years ago increased by more than 500% in value.
More importantly, gold is a finite commodity, it will likely become exponentially more valuable when there is none left to mine. These facts show that gold is a safer, albeit significantly less sexy, bet than cryptocurrency. Beckham might want to put his $750,000 in a Gold IRA or gold bullion Red Rock Secured instead of bitcoin.