BTC vs Gold

Welcome to the new year! One of my favorite things to do at the beginning of each new year is to rebalance my investment portfolio. I like taking a look at my stocks, bonds, mutual funds, and ETFs to make sure that everything looks good and that I'm ready for another successful financial year. A lot of people have been speculating about the possibility of a recession in 2020, and I had a little bit of difficulty determining whether I wanted to purchase gold or Bitcoin to serve as a hedge against this economic uncertainty. Both gold and BTC are often looked to as safe haven assets, and each of them can have different advantages. In this article, I will use the "minimum price appreciation" metric to demonstrate that physical gold must appreciate more than crypto for the investor to realize a similar profit.

I know that “minimum profitable appreciation” can sound a little bit confusing, so let me explain it. Anytime you buy an asset, there are fees involved. These can be trading fees, shipping fees for tangible assets, and the difference between the buy and sell price. As I am considering purchasing either Bitcoin or gold, one of the questions that I ask myself is, “How much does the asset need to increase in price to make up for all the fees involved with purchasing, storing, and shipping the asset?”

Costs of Gold Transactions

I will start off with gold since it is considered by many individuals to be one of the oldest forms of money, and it is the traditional “Safe Haven” asset. For those of you who may not be familiar with gold, the price of gold is determined by the commodity exchange markets. The “spot” price of gold is the price of gold per ounce that you would pay if you were purchasing a 100 oz gold bar on the open market. Obviously, most of us can't afford to purchase 100 ounces worth of gold, so we have to pay a little bit of a premium to the companies that melt down the gold, certify its purity, and divide it into smaller quantities. At the time of writing, gold was about $1,520 per ounce on the open market.

Premiums for gold coins depend on the type of coin. Some coins are for collectors, but bullion coins are designed to have lower premiums and are typically traded solely for their metallic content. For the purposes of this article, and to ensure a fair comparison, I will use the example of a American Gold Eagle coin, which is one of the most liquid, widely recognized coins in North America and also has one of the lowest premiums. At the time of writing, it was possible to purchase a coin for $1,559.58, but the company will only buy back the coin for $1,521.59. This spread between the buy/sell price means that are coin would have to appreciate by at least $37.99 for us to break even.

However, that's not the only cost. Although most purchases above a small minimum order ship to us for free, we have to pay shipping costs to the company if we want to sell to the coin. I used the cheapest shipping method offered by UPS, But due to the value of the materials, shipping charges were about $33.44.

Once we consider both the difference between the buy/sell spread and the shipping charges, we will need our one-ounce gold coin to appreciate by about $71.43 just to break even. Percentage-wise, we need a minimum of a 4.5% price appreciation.

Bitcoin Transaction Costs

Now, let's take a look at Bitcoin. Using coinbase pro, there is a .5% fee to buy, and .5% fee to sell. In addition, there is still a buy and ask spread between the purchase price and the sale price for Bitcoin. Looking at the recent transactions on coinbase pro, it appears that this spread is quite small and averages less than one US dollar. Adding the buy and sell fees as well as the bid/ask spread means that BTC would have to appreciate by approximately 1.0005% to be profitable.

Bitcoin and gold are both assets that people purchase when they are uncertain about the economic future. Gold has a long history as being a hedge against inflation, and Bitcoin was created as a reaction to the 2008 financial crisis. Each of them does have some advantages and disadvantages, but I think it's fair to say that they fulfill a similar function of protecting against economic downturns, and many individuals may be wondering which is best to purchase.

Conclusion

Due to the trading fees and shipping costs, gold would have to appreciate much more than BTC for the investor to offset the trading costs and realize a gain. Does that mean that Bitcoin is superior to Gold? Not necessarily. If gold appreciates by 20% next year and Bitcoin appreciates by 10%, then gold is still the better investment. That being said, I'm terrible at price prediction so I'm not even going to try and make a guess as to which asset will do better. However, it is at least worth considering that gold must appreciate by MORE than crypto to have the same realized gain.

I still haven't decided whether I want to purchase Bitcoin or gold as my "Safe Haven" asset. Each of them fulfills a similar function, but they also have important differences beyond simply price appreciation. Obviously, this isn't financial advice, but I do think investors should be aware that gold (and other precious metals) have significant transaction costs that could eat into profits. Crypos do have transaction costs as well, but these are significantly less than gold which means that even if both assets appreciate by the same amount, the crypto will be more profitable due to the lower transaction costs.

Image Adapted from: https://unsplash.com/@denarium_bitcoin