In short, cryptos are no substitute for gold.
Gold is different from almost every other asset because it is used in so many ways. Investors and central banks own gold to generate returns and protect their wealth. Jewelry is a major part of gold demand. Gold is also a key component of electronic devices, from cell phones to TV sets. (Figure 1).
As gold has multiple uses, its’ price can be more resilient than prices of many other assets. When financial markets are under stress, investors buy gold as a haven. When economies are doing well, consumers buy more gold jewelry and electronics.
For our discussion, we refer to bitcoin statistics when we talk about cryptos, since it has the largest market capitalization of all cryptocurrencies.
Some consumer research shows that investors are more likely to view cryptos as a high risk, high return, speculative bet compared with gold. (Table 1) Cryptos can experience big price swings. Bitcoin, for example, has soared and tumbled in value over the past year, as speculators have piled in or sold out.
Gold is mined across the world and no continent accounts for more than 30% of global production.
Ownership of gold is diverse. The US Treasury is the largest known holder of gold, but it owns just 4% of all the gold above ground. Almost 50% of this stock of gold is in jewelry owned around the world, while and more than 20% is owned by investors as gold bars and gold coins.
In 2021, entities in five countries controlled, on average, 80% of computing power on the Bitcoin network. Bitcoin ownership is also highly concentrated – just 2% of Bitcoin holders own 95% of all available Bitcoins.
Gold tends to come into its own when equity markets are under stress. Bitcoin, however, does not follow this pattern. From November 2021 to May of 2022, for example, Bitcoin more than halved in value, as the S&P 500 index and the Nasdaq both fell back. Gold, by contrast, held steady.
As cryptocurrencies are much more volatile than gold, our analysis suggests that investors who own cryptos would benefit from adding gold to their portfolios, to reduce overall risks and increase long-term underlying returns.
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