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Over the recent years, the financial landscape has transformed with rising demand for Bitcoin. While Gold and the US Dollar have long held their positions as stalwart players, Bitcoin has boldly entered the race, establishing itself as an emerging asset class. Each of these three assets possesses distinct characteristics and potential benefits, creating a dynamic landscape reflecting wealth and investment evolving nature. Let’s delve into the comparative study of Bitcoin, USD, and gold over the past decade.

Age and Nature of the Assets
Gold, a trusted store of value for centuries, has been a staple in the financial markets since the 1970s. However, the landscape changed significantly with the introduction of the first gold exchange-traded fund (ETF), Gold Bullion Securities. Launched on March 28, 2003, on the Australian Securities Exchange by ETF Securities and its major stakeholder, Graham Tuckwell, this event marked a significant evolution in gold investment.

Historically, gold has demonstrated its resilience by serving as a hedge against inflation amid economic uncertainties. This characteristic has established Gold as a preferred choice for investors looking to safeguard their portfolios. Despite encountering short-term fluctuations, Gold has maintained its reputation as a stable investment, particularly appealing to risk-averse investors. The enduring popularity of Gold as an investment option underscores its time-tested role in providing stability amid the dynamic currents of the financial markets.

In contrast, Bitcoin debuted in the aftermath of the 2008 recession. Despite being a relatively young player in the financial arena, it has gained a lot of popularity among investors, garnering usage by approximately 4% of the global population. Over the past few years, Bitcoin has witnessed a surge in retail and institutional interest. The submission of Bitcoin spot ETF applications by major corporations such as BlackRock, Fidelity, and Grayscale signals a surge in momentum. Furthermore, the regulatory landscape, once characterized by ambiguity, is gradually evolving to accommodate and address the challenges posed by this innovative digital asset.

The US dollar has been the world’s primary reserve currency since the conclusion of World War II, making it the most widely utilized currency in international trade. The considerable global demand for dollars not only facilitates the United States in borrowing money at a lower cost but also grants the nation leverage in using its currency strategically as a diplomatic tool. However, this advantageous position is not without its drawbacks.

As the world’s primary reserve currency, the USD has been a lynchpin in global finance for decades, influenced by many factors, including interest rates, economic growth, and geopolitical events. Despite its pivotal role, the USD is not immune to challenges, as it has witnessed periods of inflation and depreciation, threatening its purchasing power over time. This dynamic nature underscores the need for a nuanced understanding of the complexities and vulnerabilities associated with the world’s leading reserve currency.

Gold is renowned for its stability and has historically been considered a safe-haven asset. While the price of Gold can fluctuate, it generally experiences less volatility compared to Bitcoin. Investors often turn to gold as a hedge against market turbulence during economic uncertainty.

On the other hand, the US Dollar typically experiences lower volatility than Bitcoin but more than Gold. As discussed above, the stability of the USD is influenced by various global economic factors.

When we talk about Bitcoin, in comparison with Gold and USD, it is obvious that it has higher volatility, being a nascent and emerging asset class. Over the past decade, the LBMA Gold Index has had an annualized volatility of almost 14%, roughly one-tenth the annualized volatility of Bitcoin. However, the volatility of Bitcoin is reducing drastically; for instance, over the past year, Bitcoin’s volatility was only 49%. This highlights that while cryptocurrencies like Bitcoin continue to be riskier investments, the markets are becoming more mature and less risky with time.

When considering potential returns, Bitcoin emerges as the clear frontrunner, outpacing Gold and the US Dollar (USD) by a considerable margin. The staggering Compound Annual Growth Rate (CAGR) of Bitcoin stands at an impressive 47% over a past 10 year period, showcasing a remarkable performance that dwarfs the growth rates of Gold and USD. To put this into perspective, Bitcoin’s CAGR is nearly six times that of Gold and an astounding fifteen times greater than that of USD over the same period.

Given its historical performance, investors seeking opportunities for substantial returns may find Bitcoin an attractive prospect. However, it’s crucial to acknowledge that higher returns come with higher risks, and the volatility associated with Bitcoin must be carefully considered in the broader context of one’s investment strategy and risk tolerance.

In evaluating risk-to-reward ratios, particularly using the Sharpe ratio, Bitcoin’s performance closely aligns with that of the USD DXY Index, an index reflecting the value of the US Dollar. In this context, it’s intriguing that Gold, as a traditional store of value, boasts the highest Sharpe ratio, standing at a notable 0.5 over the past decade. This outpaces both the USD, with a Sharpe ratio of 0.4, and Bitcoin, which registers a ratio of 0.35 during the same period.

Gold’s elevated Sharpe ratio suggests a favorable balance between risk and return, making it appealing for investors seeking a stable and efficient asset. On the other hand, both the USD and Bitcoin exhibit slightly lower Sharpe ratios, indicating a comparatively lower efficiency in translating risk into returns. This nuanced perspective on risk and reward emphasizes the importance of diversification in investment portfolios.

When comparing Bitcoin, Gold, and the US Dollar (USD) over the last decade, their respective liquidity profiles provide essential insights into their market dynamics.

Despite its relatively short existence compared to Gold and the USD, Bitcoin has exhibited a remarkable liquidity increase. The growing acceptance of Bitcoin among institutional investors and the development of cryptocurrency exchanges have significantly enhanced its liquidity. This means that larger transactions can be executed with minimal impact on the asset’s market price, making Bitcoin increasingly attractive to retail and institutional investors.

Historically considered a highly liquid asset, gold maintains its status as a cornerstone in global financial markets. However, its physical nature introduces certain logistical challenges in large-scale transactions. The process of physically transporting and verifying Gold can be time-consuming, impacting its liquidity compared to digital assets like Bitcoin.

The US Dollar, the world’s primary reserve currency, boasts unparalleled liquidity. It is widely accepted in global trade and is the standard currency for international transactions. The USD’s liquidity is further bolstered by its status as the preferred reserve currency for central banks and financial institutions, ensuring it remains highly liquid across various markets.

In conclusion, the comparative analysis of Bitcoin, Gold, and the US Dollar over the past decade reveals a nuanced financial landscape shaped by the interplay of tradition, innovation, and economic forces. Each asset brings its unique set of characteristics and challenges to the table.

As investors navigate these diverse options, allocating resources between Bitcoin, Gold, and the USD necessitates carefully considering risk tolerance, investment objectives, and the evolving nature of the global financial landscape. Diversification strategies that balance each asset’s unique strengths and challenges may provide a resilient approach to wealth management in an ever-changing economic environment.

(The author, Mr Edul Patel, is CEO of Mudrex, a Global Crypto Investment Platform)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)

  • Published On Nov 11, 2023 at 07:03 PM IST

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