When buying a commodity, share or asset of any kind, you have to accept some price volatility as part of the risk. What goes up can easily go down, potentially leaving you out of pocket at some point. However, some investments can be more financially damaging due to price swings than others.
For all the talk about cryptocurrencies surpassing gold, or even being dubbed ‘digital gold’, the volatility of such cryptocurrencies is leading some to wonder whether it’s better to simply return back to gold itself to protect their wealth.
Meanwhile, others are considering the potential of the two asset classes working in tandem, combining the high risk, high reward potential of cryptocurrency with the historical protection of gold when it comes to securing that new wealth.
Volatility vs. Stability
For much of human history, the price of gold has seen relative calm in nominal terms. Gold prices only became volatile after the end of the Bretton Woods system, the start of the great commodity boom of the 2000s and again during the COVID-19 pandemic. The price of gold initially rose in value as a way of counteracting devaluations in the US dollar, but more recent spikes have tended to coincide with periods of high stress in the markets.
The Soviet invasion of Afghanistan led to a price spike in 1980, and the 2011 debt ceiling crisis in the United States led to another. The COVID-19 pandemic, which saw interest rates cut and prevalent uncertainty about the economic impact of the virus, led to gold prices hitting all-time highs in the summer of 2020.
Such movements in the gold price tend to follow the same logic: gold prices have historically increased during periods of economic and political uncertainty. The gold price reflects sentiment in the market and a perception that gold will provide a way of protecting wealth during such situations and periods of uncertainty.
Cryptocurrencies, on the other hand, display a far greater degree of volatility and the logic is not so well understood. Since its inception, Bitcoin has endured at least three price bubbles, each one involving a massive increase in value before a crash. These run on a roughly four-year cycle; in Bitcoin’s case possibly aligning with the currency’s halving mechanic.
Other cryptocurrencies show wild swings that often seem to be driven by nothing more than a well-timed tweet. There is little time for stability in cryptocurrencies, prices are either surging or crashing.
As Mark Northway, investment manager at Sparrows Capital claimed in 2021, “The price of cryptocurrencies is not underpinned by any intrinsic value; indeed, it is determined by only one thing – confidence.
“Confidence in what? Pure crypto assets produce no cash flows and no economic output. Their price is an equilibrium point between those who think it will increase and those who think it will fall. This extreme dependence on supply and demand means that there is no natural price limit on the upside, and that the downside is limited only by zero.”
This is high-risk high-reward investing at its finest. If you can ride the wave and follow the cycles at the right time you can be sitting on significant profits very quickly. The challenge with cryptocurrency profits, however, is what to do with those profits. You can’t leave them in crypto due to the downside risk. But cashing out such large sums into sterling leaves you at the mercy of inflation – a threat that looks set to grow in 2022.
Fortunately, as an historic preserve of wealth, gold could hold the answer.
Gold leads the way
Investor Warren Buffett claims all of the world’s gold which exists above ground, when melted down and shaped into a single cube, would have sides measuring barely 20 metres each. Gold has managed to maintain a high, steadily increasing value thanks in part to its intrinsic value and scarcity. Gold doesn’t corrode when exposed to oxygen, allowing it to retain its shine for what seems like an eternity. It has served as the foundation of many currencies over the course of human history, and also has some value as a conductive metal, leading to many of the devices we have containing small traces of gold within.
Bitcoin ended 2021 firmly in the red, having peaked during the year, and is now over 33 per cent lower than it was during that peak. By contrast, gold prices are roughly 16 per cent lower than their 2020 peak, but the price decline has been far more gradual. Comparing the two, you can see that Bitcoin has lost twice as much value as gold did since 2020, but over a period of just two months.
Could this be the bottom of the market before we see another bull-run for Bitcoin? If so, it might be time to think about what to do at the next peak.
As we’ve seen, gold is an historically more stable hedge while Bitcoin offers more violent price swings – both up and down. There is no such thing as certainty in the investment markets but investors can plan to ride the wave and the gold price and Bitcoin prices are starting to complement each other in a rather interesting manner.
Looking ahead to 2022 and beyond, the fundamentals suggest gold could be more likely to attract buyers, as inflation remains elevated in many countries. Gold has often outperformed other assets during times of high inflation, as seen in periods such as the stagflation of the 1970s. Some of those pouring into gold could potentially be former cryptocurrency investors, who wish to protect their wealth with a safe haven less prone to sudden price crashes.
If you are looking to add a level of balance to your portfolio, holding physical gold is one of the safest options. Gold coins and bullion bars are both good options to consider and UKK Bullion have an array available for purchase. If you wish to learn more about buying gold, get in touch with UK Bullion today.