Should you buy Bitcoin on Diwali, Dhanteras, Festivals in 2021? If compared to Bitcoin, Gold has grossly underperformed. As the cryptocurrency has given an annual return of around 230% in the last 10 years!
For ages, Gold has served multiple purposes. It looks nice and bright and is considered auspicious. Not just for wearing as jewellery or storing as an asset, gold is also used in certain religious rituals. Be it a child’s birth or someone’s marriage, no celebratory occasion is considered complete without a gift of gold. It can’t be denied that Gold holds a special place in every Indian’s life.
But, when it comes to its relevance as an investment option, have you ever wondered – is everything golden about the Gold?
One of the arguments in favour of buying gold for investment that you may have heard is that it will save you in difficult times. And this has been such a powerful argument for ages that, according to an estimate by the World Gold Council (WGC), Indians households may have accumulated up to 25,000 tonnes of yellow metal. This is around 12.65% of the total 1,97,576 tonnes of Gold mined throughout history!
However, if we keep the religious and auspicious aspects of Gold aside, a new challenger to it as an asset class has emerged rapidly in the last 10 years in the form of Bitcoin, which is being seen as a new Gold, or the digital gold of 21st century. This article examines whether this cryptocurrency could be the new gold that you should buy in this festival season to fund your future.
Gold and Bitcoin – similar or different?
Prof Purushottam Anand, Assistant Professor, IFIM Law School, says both Gold and Bitcoin are different in character and utility.
“Gold is an asset that has been recognised and accepted both as a ‘store of value’ and a medium of exchange for centuries. Cryptocurrencies belong to a new asset type and have not even completed a decade of existence. Though some of the leading cryptocurrencies like Bitcoin have been compared to gold by many crypto enthusiasts, cryptocurrencies widely differ in their character, utility and technology involved and it is not prudent to paint them with a single brush,” says Prof. Anand.
However, according to other experts, Bitcoin takes a lot of inspiration from Gold and even improves upon the yellow metal in many ways. But scepticism and lack of clarity from the Government is stopping several Indians from investing in Bitcoin.
Bitinning founder Kashif Raza believes that Gold deserves all the credit it has received till now as an asset class. But Bitcoin is the future.
Raza says being unique, precious and rare, or scarce, are the three main specialities that have made Gold a universally acceptable store of value for ages. Bitcoin, though it is new, possesses all these specialties and improves upon Gold in many aspects.
“The advent of Gold provided a level playing field for transactions across the world. Gold deserves all the credit it has received till now. Buiding its reputation in thousands of years, Gold has always retained its value and the world believed in it, giving authenticity to the cultural narrative that one should accumulate gold on every possible occasion,” Raza says.
However, for the new generation, which does its transactions virtually and is not too much attached to the notion of tangibility, the advent of Bitcoin has given them access to a digital asset that can be exponentially more rewarding than Gold in the long run, he adds.
There are several strong arguments in favour of Gold, making it the go-to asset during festivals. But Bitcoin is rapidly challenging all these arguments. Take a look:
First, rare and limited supply.
Raza says Gold is unique because its supply doesn’t increase as per demand. But in the case of Bitcoin, increasing the supply is impossible.
“We have been hearing for years that supply of Gold will end one day. But the reality is that its supply has gradually increased, though not as much as the demand. There are still many unexplored sources of Gold and we are not sure of how much gold is still there to be explored. But when it comes to Bitcoin, the last of it will certainly be mined by 2141. As many as 18.8 million bitcoins have already been mined and only 2.2 million are left,” he says.
Manoj Dalmia, Founder and Director, Proassetz Exchange, also says that Bitcoin is rare. It cannot be created at will as there are only 21 million of them, and no one can create more. That means that no government can control it or fake it.
When it comes to Gold, no one is going to create more gold which will be feasible. However, the scarcity of gold changes depending on how much you put into finding it, says Dalmia.
Founder of cryptocurrency exchange WazirX, Nischal Shetty, says, “Bitcoin has been given the name of digital gold due to the limited supply of coins available. HODLERs believe that these traits – combined with global availability and high liquidity – make it ideal for storing wealth for longer durations, believing the value will escalate over time.”
Shetty suggests we need to distinguish the similarities between Bitcoin and Gold.
Second, tangibility and flexibility
Seeing is believing. This is one major argument that puts Gold ahead of cryptocurrencies in the eyes of many. Gold is tangible. You can hold it in hand and store it at home or in a bank locker.
In contrast, everything about bitcoin is virtual. So, how can one believe in something virtual? Something that has no physical appearance and can’t be experienced…the argument goes on.
But Raza differs. He says times have changed. The way we deal with money now is not the same as it was, just till a few years ago.
“We now have a UPI generation, which doesn’t like to carry cash. It is comfortable in online and mobile transactions. For such a generation, tangibility argument doesn’t make much sense,” he says.
“Secondly, gold is not a flexible asset. In times of crisis, you can’t carry it everywhere, nor can you sell it in very small fractions. But when it comes to Bitcoin, you can sell it in very very small fractions, that too in a few seconds on your mobile phone,” he added.
As many as 100 million satoshis make one bitcoin, where one satoshi is equal to Rs 0.0355223 (as per the current rate).
Gold has given around 158 percent returns since 2010. The price of 10 grams of 24-carat gold in 2010 was around Rs 18,500. Today, the price of the same amount of gold is Rs 47,810.
If compared to Bitcoin, Raza says Gold has grossly underperformed. As the cryptocurrency has given an annual return of around 230% in the last 10 years!
Sharat Chandra, Blockchain and Emerging Tech Evangelist, agrees, saying, “Bitcoin has become the numero uno asset, dislodging gold from its pedestal. It is the best performing asset class of the decade thanks to an annualized return of 230%. Bitcoin has emerged as a challenger to the yellow metal and is therefore rightly hailed as the ‘Digital Gold’ by bitcoin maximalists and crypto enthusiasts all over the world.”
It is not that only Bitcoin is volatile. Experts argue that even Gold has had its volatile days.
“One could argue about the volatility associated with bitcoin prices but let’s not forget that even gold had its share of volatile periods before it matured as an institutional asset. Crypto, as an asset class, is fairly young and the volatility would be reduced significantly as the cryptocurrency market grows and more institutional players start moving in,” says Chandra.
One can fake a piece of Gold and it needs to be tested for purity. But no one needs to test Bitcoin for purity.
“Bitcoin and gold can’t be counterfeited and duplicated. Bitcoin is easy to recognize and impossible to counterfeit. Gold is pretty recognizable, though it must be tested for purity under some circumstances,” says Dalmia.
Hedge against inflation
According to Chandra, Crypto can help in hedging portfolio risks and therefore in some ways better than gold in terms of paring down risks of inflation. “Gen Z and millennials aren’t too fond of physical or paper gold. Given the returns cryptos have offered, they might allocate more capital towards crypto,” he says.
Dalmia says investors view bitcoin as digital gold and a hedge against inflation, expecting it to appreciate over time over-performing the current inflation rate. “The same stands for Gold but it has not performed well in the past few years.”
Should you invest in Bitcoin?
Now, the big question everyone is asking these days: If Bitcoin is so good, should I invest in it?
Investing in Gold has always been associated with a sense of security. That you can sell your gold at any point of time at a higher price. But when it comes to cryptocurrency, Prof. Anand believes that Bitcoin or other cryptos may not serve this purpose in near future in India.
“Investment in Gold offers a sense of security due to stability in price movement. In the case of cryptocurrencies, price volatility is much higher and it is difficult to estimate the movement of price especially from a short term perspective. Though investors have been able to sell their cryptocurrencies at a higher price from the long term standpoint, sometimes, they may have to wait for the market to recover from any short-term crash to be able to book any profit. Thus, as of now, crypto seems unlikely to serve this purpose in the future,” he says.
“Gold enjoys a special privilege in our society because it is also used as jewellery and has been associated with a festive celebration in historical and cultural context. Investors also prefer to buy gold during festivals because of its tangible form and aesthetic value. It may be right to claim that crypto could be a ‘better investment for more returns’, but gold still seems to be a ‘safer investment’,” Prof. Anand adds.
However, several experts believe that the price of Bitcoin would continue to increase in the long run.
Raza says one should look at Bitcoin as a long-term investment option.
“Even when we buy gold, we hold it for several years. Many families would resort to selling gold as the last option and only during a crisis. One can generate wealth from Bitcoin also if he/she invests in it like gold and for a long duration.”
For many experts, Bitcoin is already the digital Gold of the 21st century. But they underline the need for more awareness and caution.
As Kumar Gaurav, Founder & CEO of Cashaa, says, “Bitcoin has already been digital gold for me for the past few years. However, People still have to understand the fundamental of Crypto to do a head to head comparison and should look more than price speculation,”
Gaurav Dahake, Founder & CEO, Bitbns, says crypto gifting is now catching pace especially among millennials and GenZ’s. “While gold has given an average return of 12-14% in the last 10 years, Bitcoin, with an annualized return of 230% over the same period, has outmarched all other traditional assets by a big margin and presents itself as a very attractive investment avenue in the long run,” he says.
How much should you invest?
A lot of regulatory clarity on Bitcoin and other cryptocurrencies are yet to come. Hence it is important not to let greed or the lure of very high returns drive your investment decisions.
In personal finance, experts suggest having a balanced investment portfolio. Balancing is important even while investing in crypto.
Though there is no particular limit that can be prescribed for investing in Bitcoin. It would be prudent not to put all your savings, or emergency fund in Bitcoin, experts say.
“Crypto investment should not exceed more than 5 percent of your portfolio. Follow the basics of investing and do your own research before investing in cryptocurrencies,” suggests Chandra.
Prof. Anand says, Gold and Cryptos have different roles to play and an investor must strategically diversify the investment portfolio considering his/her risk appetite. It is also advisable to seek assistance from financial advisors before making such decisions.
(Disclaimer: The suggestions/recommendations around cryptocurrencies in this story are by the respective commentator. Financial Express Online does not bear any responsibility for their advice. Please consult your financial advisor before dealing/investing in cryptocurrencies.)