Cryptocurrency’s Impact on Gold Investments

Stuart Simonsen

Investors tend to put gold and cryptocurrency into the same category — inflation-proof investments. However, Stu Simonsen reports that neither asset performed particularly well last year amid exceptionally high inflation rates. In fact, Bitcoin was down a whopping 71% from its record high in November 2021, and gold prices were down roughly 20% from their March peak.

Cryptocurrency is dubbed “digital gold” because it’s also a speculative investment that can, in theory, be utilized as legal tender. Not to mention the supply of gold and crypto is more restricted than dollars, theoretically making such assets less malleable toward inflation.

Despite Their Similarities, Gold and Cryptocurrency Are Different

Every investor understands the importance of portfolio diversification. However, many believe it’s wise to hold either gold or cryptocurrency due to their similarities — and that simply isn’t the case. Why? Because gold and crypto are fundamentally different.

Gold’s role in portfolios differs from cryptocurrency. The sources of demand are distinct — gold has served as an exchange means for over 2,000 years and is owned by central banks, institutional investors, and individuals. Unlike cryptocurrency, the yellow metal is also a consumer good, lifting its value.

The similarity comparison is deemed “too simplistic” by highly experienced industry moguls as it overlooks categorical differences between both assets. They perform uniquely in portfolios, and their market dynamics vary wildly.

Crypto’s Recent Performance

Early 2022 proved terrible for cryptocurrencies after the Federal Reserve began raising interest rates to cope with inflation.

David Haas, a CFP at Cereus Financial Advisors, says the rise in crypto during 2021 occurred during extremely low interest rates when risk assets were attractive. Individuals could borrow with next to no interest. But that liquidity drained away as the demand wore off amid hiking inflation.

That said, Haas expects the crypto to stabilize and improve as the Fed stops raising the rates or lowers them.

Stu Simonsen

Gold’s Recent Performance

Gold prices declined to $1,645 at the end of 2022, tarnishing its reputation as a scarce commodity and increasing its lackluster record of a safe inflation hedge.

It appears that many investors saw gold as a short-term protection. However, Kevin Lum, a CFP at Foundry Financial, says it only seems to keep purchasing power safe over longer durations.

The biggest factor in this asset’s performance was the strength of the dollar, which hit its 20-year high in September of last year. As Europe’s and China’s economies slowed, investors migrated to the dollar, deeming it a safe haven during economic uncertainty.

But that doesn’t mean it’s better than crypto at hedging against inflation.

Gold Beats Crypto in The Volatility Battle

While both gold and cryptocurrency aren’t the inflation protection many still think they are, gold wins the volatility battle.

Crypto has proven to fluctuate based on the media, hype, regulatory movements, and investor sentiment. But gold doesn’t have this issue — it remains steady in the face of all those variables, making it less volatile than its digital “cousin.”

The similarities are evident, but both assets offer wildly different benefits and drawbacks. Either way, investors can wield both as portfolio diversification tools.

Stuart Simonsen
Stuart Simonsen