The Federal Reserve recently announced another 0.75% rate increase, which predictably sent the stock market tumbling. Higher borrowing costs eat into corporate earnings, which batters stock prices and sends investors into 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 a large segment of the investment community. A lot of this has to do with the fact that many alternative investments have shown an ability to perform and generate wealth independently of the stock market’s performance. It stands to reason that when the stock market goes south or experiences a market correction, an even larger segment of the investment community becomes interested in alternative investments.
Gold vs. Cryptocurrency
For many investors, the battle of gold vs. cryptocurrency is one of perspective. Gold has been an established alternative investment champion for decades because of its consistent ability to deliver returns when the stock market slides or inflation eats into the value of paper currency. Cryptocurrencies, on the other hand, are the new kid on the block.
Led by Bitcoin, crypto burst onto the market a little 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. Unfortunately, the last 12 months have been disastrous. Many cryptocurrencies, including Bitcoin, have been in freefall for most of 2022.
Numerous crypto exchanges have collapsed and Bitcoin is trading at $18,838.00. That means it's down about 60% from September 2021, which classifies as an absolute wipeout. When Bitcoin hit its peak in 2021, pro athletes like Odell Beckham Jr. took their entire salary in Bitcoin. The net effect of that was to throw about two-thirds of his estimated $750,000 pre-tax earnings into the fireplace.
After taxes were taken out of his salary, Beckham’s cryptocurrency bet netted him about $35,000. All told, that’s a $720,000 loss.
The resurgence of the dollar has knocked the price of gold down from roughly $1,900 per ounce in September 2021 to roughly $1,670 per ounce today. However, even by that metric, Beckham would have given back about 10% of his pre-tax earnings as opposed to almost 70%.
The other difference is that had Beckham 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 cryptocurrency will even be here 10 years from now, much less 100. By contrast, an ounce of gold that sold for $371.83 100 years ago has increased by over 500% in value.
More importantly, gold is a finite commodity, it will likely become exponentially more valuable when there is none left to be mined. These facts show that gold is a safer, albeit decidedly less sexy, bet than cryptocurrency. Beckham might wish he’d put his $750,000 into a Gold IRA or gold bullion from Red Rock Secured instead of Bitcoin.
