If you read anything written by cryptocurrency evangelists, you might come away thinking that cryptocurrency is the greatest thing since sliced bread. It’s the wave of the future, a currency, store of value, revolutionary technology, and it might even help cure cancer.
That last part might be a bit hyperbolic, but not to some crypto devotees. Those who are devoted to spreading the gospel of cryptocurrency are very often fanatical in their devotion, and that’s why the current crisis hitting cryptocurrency markets is proving to be so troubling to them.
Cryptocurrencies have exploded onto the scene over the last 13 years, growing from mere curiosities into well-established investment assets that are traded on international exchanges 24/7. And many people have been attracted by the promises cryptocurrencies seem to offer, especially asset growth.
Bitcoin, the first widely popular cryptocurrency, went from being worth only fractions of a penny when it was first introduced to being worth over $60,000 at one point. But now Bitcoin, like most cryptocurrencies, has gone into a tailspin, falling to under $19,000 recently.
For those who claimed that Bitcoin was digital gold and a better hedge or store of value than gold, that decline has been a bitter pill to swallow. And it could undermine the argument that Bitcoin is somehow better than gold as a hedge against inflation and financial turmoil.
The Advantages of Cryptocurrency
That isn’t to say that cryptocurrencies are worthless. As badly as Bitcoin has performed this year, it’s still worth nearly $19,000, so anyone who got in on the ground floor, or even got in as it was passing $1,000, $2,000, or even $5,000 is still better off today.
And despite the poor performance of Bitcoin this year, it and similar cryptocurrencies have some real strengths. Foremost among them is that they are decentralized systems, so that one single issuing authority can’t make a unilateral decision to issue more units of the currency.
Bitcoin was developed in response to the Federal Reserve’s quantitative easing (QE) policies that were adopted to combat the 2008 financial crisis. With trillions of dollars of liquidity entering the financial system, the Fed sought to keep asset values permanently high. But by doing so, it devalued the purchasing power of every existing dollar in the economy.
Bitcoin was specifically set up to avoid that problem, by fixing the number of bitcoins that could be “mined.” It also ensured that no one could gain enough power to force changes to the Bitcoin protocol and destroy Bitcoin’s advantages.
Bitcoin was designed from the outset to be a digital equivalent to gold, hence the mining process required to bring bitcoins into existence. Many of Bitcoin’s early adopters even thought that Bitcoin would replace gold as a store of value and as a hedge against inflation and financial turmoil. But has Bitcoin, and have cryptocurrencies in general, lived up to that promise?
Gold’s Track Record
One of the reasons gold has been so trusted as a hedge over the years is that it has a track record that dates back millennia. Gold has served as money and as a store of wealth almost from the beginning of recorded history. And its record of acting as a hedge and wealth protector throughout crises has only strengthened in recent years.
For those who think more pragmatically, who may think “Well, what has gold done lately?”, the evidence is there to make the case for gold. During the stagflation of the 1970s, gold’s annualized gains were over 30%, growing leaps and bounds higher than even the inflation that peaked at 11%.
During the 2008 financial crisis, gold gained 25% while markets collapsed by more than 50%. And in the aftermath of the recession gold continued to make gains while markets and investors struggled to regain their footing.
It’s no wonder then that investors who are looking to protect themselves against financial loss continue to look to gold. And with the future looking ominous for the economy, and with recession on the horizon, more and more people are choosing to buy gold to protect their wealth.
Is Gold What You Need?
While Bitcoin and cryptocurrencies could end up being another hedge, just like gold, the jury is still out. Certainly the behavior cryptocurrencies are demonstrating today doesn’t seem very hedge-like.
Gold isn’t immune to price loss. During 2008 gold lost value at some points just like markets did, and we’re seeing a repeat of that of sorts today. While gold is still outperforming markets, it looks like we’re seeing a repeat of 2008, in which assets across the board are struggling to make gains as investors large and small are starting to panic, divesting themselves of assets in order to come up with cash, close out positions, or pay down debt.
But while gold is down around 1% on the year, Bitcoin is down almost 60%. That’s hardly the kind of behavior you would expect from an asset that can serve as an effective hedge. And other cryptocurrencies are faring even worse.
Who knows where Bitcoin will end up? The next crisis will be the first big test of Bitcoin and cryptocurrencies. We’ll find out whether Bitcoin will live up to the hype and establish itself as an actual hedge and store of value, or whether those who trusted in it were sorely mistaken.
The question you have to ask yourself is, would you trust your wealth to something unproven? Do you want to be the guinea pig who tests whether Bitcoin is really a useful hedge? Or would you rather trust a proven asset like gold?
There’s a reason that so many people are trying to protect their savings with gold. As good as Bitcoin may end up being, there’s just no substitute for the tried and true protection that gold can offer.
Whether you’re looking to protect your retirement savings against loss, trying to hedge against inflation, or just building up a nest egg of gold coins to have available for a rainy day, Goldco’s experts can help you find the gold products you want. Give Goldco a call today to learn more about how gold can help you safeguard your financial future.
Trevor Gerszt is the founder and CEO of Goldco, a precious metals dealer in Los Angeles. For more than 20 years, Trevor has sought out ways to help people build long-term wealth through the security and stability of precious metals and other alternative assets. Goldco is A+ Rated by the Better Business Bureau, a 5-Time INC 500 Winner and has countless 5-Star Reviews for its quality customer service, dependability and strong reputation.
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