Gold vs Crypto: Which Is the Better Hedge Against Dollar Disaster?

No one can deny there has been a lot of crazy news lately. These kinds of developments often shock the markets. 

In particular, the ongoing pandemic has forced the government to increase spending at an alarming rate, a trend which typically adversely affects the U.S. dollar. Whenever the dollar takes a hit, people often look for hedges, ways to defend against lost purchasing power from inflation.

Traditionally, that has meant buying gold or silver. Yet a new kid on the block emerged after the 2008 financial crisis: Cryptocurrencies have become real alternatives to metals as a dollar hedge.

Cryptocurrency advocates believe that crypto is a better alternative for hedging. For one, they argue, decentralization of cryptocurrency infrastructure via blockchain technology gives no entity control over its management. 

Gold often is held in governments vaults. Transparency about inventories is nonexistent. Many governments are no strangers to controversy when it comes to potentially corrupt use of stored precious metals.

Crypto, meanwhile, shows promise as an incorruptible alternative. Companies are spending billions of dollars on the development of the core infrastructure of cryptocurrency, known as the blockchain.

Blockchains can be used for more than creating and managing cryptos. They are created with specific functions in mind, such as transferring money or paying contracts. But the cryptocurrencies associated with them often serve as the reward for participating in the infrastructure process.

Currently, Bitcoin is seen as the main crypto coin. Bitcoin proved to the world that digital currencies could not only be used as a hedge but could theoretically replace fiat currencies.

It’s not without its problems, though. Bitcoin was developed as a prototype. As it gains popularity the coin is experiencing growing pains. Transactions are slow. Bitcoin also is not scalable, and there have been no solutions to date to address this issue.

As the de facto standard in the crypto space, Bitcoin has enjoyed a hack-free existence. Yet there have been issues with hacking around coin exchanges, such as the massive Mt. Gox hack among others. 

Companies in time will increase budgets for blockchain technologies, which means they will likely find a secure solution for wider cryptocurrency use.

For now, however, the risks raise doubts that Bitcoin, or any other crypto, will soon become a widely used hedge against fiat currencies, let alone a replacement for them.

Comparing gold and cryptos

Both gold and cryptos suffer from high mining costs. One does not have an advantage over the other in this department. There may be a temporary victor, but technology helps to lower costs. This factor is likely to flip frequently.

Scarcity is required to keep the value of a hedging instrument, such as gold or crypto, from falling overnight.

Both hedges are about even on the scarcity factor. Humans have been mining gold for centuries. There does not seem to be evidence that new supplies suddenly will appear, though a rising gold price can goose up investment in prospecting and mine development.

Most cryptos, meanwhile, have a production limit built into their algorithms. For Bitcoin, that number is approximately 21 million coins. There are about 18.3 million in existence now.

Even with its problems, gold has a history as a store of value. Crypto, which is far more volatile, does not — yet. Not many ordinary people have signed up for a digital wallet to hold crypto for them. It’s not clear they even understand the meaning of this concept. Few banks will store Bitcoin, though this is changing.

Digital currencies require all its participants to have the appropriate technology. While companies are taking steps to help people obtain technology, it is far from being solved. 

There is little doubt that cryptocurrencies will overcome their obstacles in the future. However, there is a sense of urgency in the world today that is giving the advantage to gold as the hedge of choice. The devil you know is better than the devil you don’t.

Recommended Articles

5 Tips On How to Retire with $500,000

The effects of retiring without a clear and suitable retirement plan can be disastrous, as borne out by the fact that Americans are filing for bankruptcy in ever-increasing numbers. Since

5 Ways Meditation Can Improve Your Health

We know that providing our bodies with good quality nutrition, sufficient hydration, and plenty of exercise plays a vital role in the state of our health. Yet, when it comes

Renewable Power is Cheaper, but Massive Power Bill Spikes Will Happen Anyway

Most electricity today is provided by burning oil and coal. Yet the world is preparing for the eventual phasing out of fossil fuels and the gradual implementation of eco-friendly renewable

6 Smart Ways to Invest Your Emergency Fund

The first rule of financial planning is that you need to have an emergency cash reserve which is sufficient to cover your living expenses for at least three to six

Warren Buffett: ‘I Blew It’ by Not Investing More In This Tech Stock

Warren Buffett’s Berkshire Hathaway has steadily been buying up more shares of Amazon. Berkshire recently increased its stake in the e-commerce tech giant by 11%, the company revealed in a

Could Heartburn Medicine Actually Give You a Heart Attack?

The symptoms of heartburn can make you feel like your heart is on fire, but taking medication to soothe it may put you at a higher risk for a heart

6 Frugal Habits That Can Make You Rich

Some people pick up frugal habits early, learning from their parents or grandparents. Others may develop the habit of frugality after going through financial troubles. Frugal people’s view of money

5 Crucial Money Decisions If You Are Forced to Retire Early

Forced retirement is a problem many folks are grappling with these days. Around 37% of retirees in the country leave work earlier than they had expected, typically due to health

6 Tips to Cope With a Job Loss Just Before Retirement

Workers in their 50s and 60s are facing the prospect of getting laid off just before the retirement door is about to open in front of them. According to a

Stop Osteoporosis in Its Tracks with These Bone-Building Foods

Osteoporosis literally translates as "thinning of bone." It is a medical condition that results in the reduction of bone mineral density and bone mass, as well as deterioration of bone

A Weekend at This Luxury Hotel Costs More Than a Typical House

As of July 2019, the average price of a hotel room in the United States was $135 a night. Renting a hotel room in a large metropolitan city costs $236 a

4 Reasons You Should Cancel or Downgrade Life Insurance

Life insurance is like a parachute. There are no second chances if you need it and don’t have it. But life situations and finances change all of the time. Here