Gold v. Bitcoin: Which is the best strategy?

In the United States, inflation rates have reached their highest in thirteen years. As has been widely reported in the media, the year-to-date rate of inflation for the USD jumped to 4.2% in April - up from 2.6% just one month earlier - and consumer prices have increased by 0.8%.

Price increases in the United States have largely been linked to a buildup in spending among American consumers, who received $1,400 stimulus checks in March. Going into the future, though, some analysts are warning of a new inflationary trend that is likely to be observed in other major world economies, post-pandemic.

As the market adjusts to this changing reality, public interest has grown in regard to various hedging options. At AlterCap, we specialize in portfolio diversification through the purchase of digital assets, including Bitcoin. In this post, we would like to demonstrate why we believe BTC should be included as a part of your inflation hedging strategy.

Digital Gold
Probably the first asset that most people think of when considering inflation hedges is gold. Just like everything else in today's digital age, however, things seem to be changing: The precious metal's historical dominance is starting to be overshadowed by Bitcoin, which performed 10 times better than gold on global markets in 2020.

Indeed, Bitcoin has taken to its moniker of "digital gold" quite nicely. Like gold, Bitcoin has a limited supply and is difficult to counterfeit (actually, unlike gold, BTC is impossible to counterfeit!).

Additionally, Bitcoin offers a number of key characteristics that truly set it apart as a hedge against inflation and as a financial tool. Here's just a few:

Advantages of Bitcoin over Gold
Advantage #1 | No middlemen
No matter how gold is purchased, stored, sold, or used, its owners must regularly come into contact, either directly or indirectly, with a range of third-party service providers. This represents significant cost and hassle on the part of the gold holder.

Think about it - let's say you buy some gold through your brokerage account. Where is that gold? The truth is that some entity, somewhere, is being paid to hold an equivalent of the gold you own. Previously, that gold had been refined and later minted by somebody. Furthermore, following a certain schedule, this custody arrangement must be audited by an independent service. This, plus regular insurance payments, are costly for the investor.

Bitcoin, as an alternative asset, can very easily be held and transacted without the involvement of any middlemen. While plenty of excellent crypto custody services exist, it is also perfectly fine for your wallet to remain at all times under your control, at no cost to you. Bitcoin transactions never require auditing as they are recorded on an immutable and public distributed ledger.

Advantage #2 | Liquidity and 24/7 access
Owners of gold only have access to their assets within the limits set by brokers and custodians. Conversely, Bitcoin users have 24/7 access to their coin, 365 days a year. All it takes is internet access to make a payment or transfer, and exchanges operate at all hours.

What's more, with each passing year, Bitcoin trading volumes increase and exchange fees go down. Just as the network becomes more secure with a growing network of users, it also becomes more and more easy to liquidate large amounts of Bitcoin.

Advantage #3 | Very cheap to store and trade
As we have already discussed in another blog post, Bitcoin, unlike gold, can be stored for free. For larger sums, of course, it is worth investing in a hardware wallet. However, this one-time purchase (roughly 100 GBP) represents only a very minor expense.

All Bitcoin transactions occur on a peer-to-peer network. This means that you can agree to carry out a trade of virtually any amount directly with any counterparty for a minimal network fee. In comparison, gold transactions just don't make sense. Peer-to-peer gold transaction involves meeting in person or through a trusted third party and are only possible when units are large.

Advantage #4 | Transparency and compliance
The distributed ledger behind Bitcoin removes the need to trust the party with which you are transacting. Fraud on the Bitcoin network cannot occur — the consensus algorithm will not allow it.

This high degree of transparency also contributes to the automation of compliance within various regulatory frameworks. This even applies AML and ATF laws. The Bitcoin network — contrary to what is often implied by the media — is not anonymous: malicious actors can easily be identified and tracked by 'looking up' their wallet addresses.

Advantage #5 | Seamless integration with DeFi
Bitcoin is an essential part of decentralized finance (DeFi). This is a major advantage for anyone interested in achieving the next level diversification in their investment portfolios.

Two key applications of DeFi are loan issuance and tokenization: On the one hand, holders of Bitcoin can earn a fixed income (interest rates generally range from 12-24%) by lending out their tokens. On the other, with Bitcoin, it is easy to participate in ICOs and STOs, purchase NFTs, or invest in staking coins. These things offer returns that have far out-performed traditional investments of late.

How to get started
If you have not started using Bitcoin yet yourself, the onboarding process is really quite simple. Depending on your jurisdiction, this process could even be easier for you than opening an online gold brokerage account.

The first step is to get a wallet. There are plenty of good software options online. For larger purchases, we recommend investing in a hardware wallet. Next, you'll just need to open up an exchange account (you can do so here). This should only take a few minutes. Then, well… that's basically it. Enjoy HODLing!

If you are interested in exploring cryptocurrency investment, we are here to help. We have helped dozens of individuals, professional investors, and businesses get started with Bitcoin and we very likely are familiary with your unique situation. You can contact us here to learn more.