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Bitcoin Vs. Gold ETFs: A Comparative Overview

Last Updated January 11, 2024 3:18 PM
Andrew Kamsky
Last Updated January 11, 2024 3:18 PM

Key Takeaways

  • Bitcoin ETFs offer digital asset exposure, whereas gold ETFs provide physical commodity-backed stability.
  • Bitcoin ETFs present high volatility, while gold ETFs are stable, safe-haven investments.
  • Bitcoin ETFs may revolutionize cryptocurrency similar to what gold ETFs did for the gold markets.
  • Choosing between Bitcoin and gold ETFs depends on investor risk tolerance and preferences.

The growing interest in both Bitcoin and gold exchange-traded funds (ETFs) is observed in the context of evolving financial environments. Given the popularity of cryptocurrencies, investors are drawn to Bitcoin ETFs to experience the volatility and possible significant returns of digital assets. 

Gold ETFs continue to be popular among investors who respect gold’s inherent worth and historical stability as a safe-haven asset. The dual momentum highlights a complex strategy in today’s diverse investing ecosystem by suggesting a diversified approach as investors navigate between the proven dependability of gold and the dynamic potential afforded by the evolving world of cryptocurrencies.

What Are Bitcoin ETFs

Bitcoin ETFs are investment tools that mirror the price of Bitcoin and are traded on conventional stock exchanges instead of cryptocurrency-specific platforms. 

These ETFs enable investors to invest in Bitcoin without the hassle of self-custody or the worry of fraud risks, eliminating the need to set up a non-custodial wallet and security. Essentially, they offer a more straightforward and secure avenue for investing in Bitcoin, aligning with traditional investment practices.

Characteristics And Features Of Bitcoin ETFs

Below are four key characteristics and features of spot Bitcoin ETFs:

  • Market accessibility: Bitcoin ETFs offer an easy entry point for individuals and institutions who wish to enter the crypto market, which is likely to gain a broader audience who will invest in the asset.
  • Simplified investment and enhanced security: By investing in Bitcoin ETFs, individuals avoid complexities and security concerns linked to direct cryptocurrency management, such as the setting up and maintenance of non-custodial wallets
  • Regulatory compliance and investor protection: Under the oversight of financial regulators, Bitcoin ETFs provide a secure and regulated investment reducing the risk of fraud and scams.
  • Liquidity and price tracking: Bitcoin ETFs offer high liquidity, making it easy for investors to buy and sell shares. 

Bitcoin Spot Vs. Future ETFs 

There are two primary types of Bitcoin ETFs namely the spot and futures Bitcoin ETFs. Each offers a different approach to engaging with Bitcoin’s market dynamics: Bitcoin spot ETFs are directly tied to the current spot market price of Bitcoin, providing investors with real-time exposure to the cryptocurrency’s immediate price movements. 

The value of these ETFs fluctuates in synchronization with Bitcoin’s spot market price, offering a dynamic and responsive investment option that mirrors the current state of the Bitcoin market.

On the contrary, Bitcoin futures ETFs track the price of futures contracts, which are agreements that set the terms for buying or selling Bitcoin at a predetermined price in the future. Futures ETFs offer an insight into the market’s expectations about Bitcoin’s future price. 

What Are Gold ETFs 

With gold exchange-traded funds or gold ETFs, one may invest in gold and be exposed to gold prices without having to deal with the difficulty of purchasing and keeping physical metal. Consider them as baskets of gold, where each share you possess is a little claim to the gold the fund is holding.

Picture yourself with a little gold bar in your palm. Owning a portion of that bar, safely kept in a vault and easily traded on a stock exchange, is what buying a gold ETF share means. It’s an investment in the potential price growth of gold without the hassle of carrying physical assets or worrying about security.

Characteristics And Features Of Gold ETFs

Gold ETFs offer investors a convenient way to trade exchange-traded funds. Their characteristics include:

  • Liquidity: They trade throughout the day on stock exchanges, just like stocks, offering high liquidity and ease of buying and selling.
  • Transparency: Their holdings and gold backing are publicly disclosed, ensuring investor confidence.
  • Cost-effectiveness: Compared to physical gold, they have lower transaction costs and eliminate storage and insurance expenses.
  • Diversification: They add diversification to your portfolio, potentially reducing overall risk.
  • Convenience: No need for secure storage or insurance, making them hassle-free.

Physical Vs. Synthetic Gold ETFs 

There are two main types of gold ETFs: Physical gold ETFs are exchange-traded funds that are backed by real gold bullion that is kept in vaults. They provide the most accurate gold price tracking. ETFs that monitor the price of gold via derivatives, such as gold futures contracts, are known as synthetic gold exchange-traded funds. They might cost less, but there’s a chance of counterparty risk and tracking inaccuracies.

The largest gold ETF in the world, SPDR gold Shares (GLD), has over 877 tonnes of gold bullion in its possession. It is a well-liked option for cautious investors looking for direct gold exposure because of its strong liquidity and close tracking of the gold market.

With the potential for increased profits as gold prices rise, the VanEck Vectors gold Miners ETF (GDX) provides indirect exposure to the gold market by tracking a basket of top gold mining companies. But it also comes with the extra risk that comes with stocks.

Additionally, ProShares UltraPro gold ETF (UGL) is a leveraged and inverse gold ETF aiming to deliver 2x the daily return of gold, meaning it can magnify gains and losses. It’s a high-risk, short-term trading tool best suited for experienced investors.

Key Differences Between Bitcoin And Gold ETFs 

Bitcoin ETFs and gold ETFs differ significantly in fundamental characteristics. Bitcoin ETFs are based on the notion that Bitcoin being a digital cryptocurrency or digital gold. 

A relatively new asset class that investors and speculators are fundamentally understanding. In contrast, gold ETFs are backed by physical gold or gold derivatives, rooted in a thousands of years old market that is well-established and understood. 

Performance And Returns Of Bitcoin And Gold ETFs 

Historical Performance Of Gold 

Since the spot gold ETF launch on the New York Stock Exchange in November 2004, starting at $444.30 per ounce, gold’s value has steadily risen, peaking at $2032 per ounce. 

Gold Price: 1974 to 2023
Gold Price: 1974 to 2023

The increase in price since the ETF launch highlights gold’s use case as an investment and a hedge against market volatility and inflation, confirming its position as a reliable asset.

Historical Performance Of Bitcoin 

Since Bitcoin’s 2009 genesis block, Bitcoin has climbed from near zero to $47,000 despite three major bear markets with up to 86% declines. 

Bitcoin Price: 2009 To 2023
Bitcoin Price: 2009 To 2023

The Bitcoin Spot ETF, launched on Jan. 11, 2024, represents a significant milestone in Bitcoin’s mainstream financial acceptance, offering a safe and regulated investment option to investors globally.

Its comparative impact against traditional assets like gold is yet to be determined, but the ETF’s debut signifies a significant shift in digital assets’ recognition within the financial market.

Risk-Reward Profile Or Portfolio Allocation 

When constructing a risk-reward portfolio that includes gold and Bitcoin ETFs, aligning the investment strategy with individual risk tolerance and long-term financial objectives is essential. 

  • Conservative investors: An older generation might adopt portfolios leaning more heavily toward gold ETFs due to gold’s stability over the years with a modest allocation to a Bitcoin ETF.
  • Moderate investors: Mid-aged investors might opt for a more balanced distribution, slightly favoring gold ETFs for stability and still holding a significant presence in the more volatile Bitcoin market. 
  • Aggressive investors: Younger investors, on the other hand, might prefer to hold Bitcoin ETFs, seeking higher returns at the cost of greater risk, while still using gold ETFs as a hedge against market fluctuations. 

Accessibility And Liquidity Of Bitcoin And Gold ETFs 

Ease Of Investment 

Both Bitcoin and Gold ETFs are accessible through traditional brokerage accounts, simplifying the investment process.

Liquidity In The Secondary Market 

Bitcoin ETFs are set to enable higher trading volumes, ensuring liquidity. Gold ETFs are also highly liquid, with a well-established market presence.

Risk Factors Concerned With Bitcoin And Gold ETFs 

Market Volatility 

Bitcoin is known for its high price volatility, whereas gold often displays more stability, acting as a safe-haven asset.

Regulatory Risks 

Bitcoin ETFs face evolving regulatory landscapes, which might potentially impact the Bitcoin performance, whereas gold ETFs have more established regulatory frameworks which hold the inherent stability that comes with holding a gold ETF.

Economic Factors Affecting Gold And Bitcoin Prices

Gold and Bitcoin prices are influenced by factors like inflation, foreign currency values, and global economic stability. 

The price of gold whilst scarce is technically not as scarce as Bitcoin. When gold prices rise, mining companies are incentivized to increase production, extracting more gold to capitalize on higher market values. 

Additionally, future technological advancements might even make extracting gold from extraterrestrial sources feasible. Unlike gold, Bitcoin’s supply is capped at 21 million coins, making it a truly scarce digital asset with no possibility of increasing its total supply.

Market Conditions And Economic Outlook For Bitcoin And Gold ETFs

The market conditions and economic outlook for Bitcoin and gold ETFs in 2024 show a dynamic and evolving landscape. The U.S. SEC recent approval of Bitcoin ETFs is a noteworthy breakthrough for the cryptocurrency market. This move may revolutionize the cryptocurrency market, much like gold ETFs did twenty years ago i.e., leading to a substantial increase in gold prices. According to experts such as Standard Chartered, it is even possible for the price of Bitcoin to reach $200,000 this year.​

Crypto investors have already tasted the distinctive volatility of Bitcoin in the early days of 2024. The price of Bitcoin experienced significant fluctuations due to investor expectations surrounding the SEC’s  decision about a spot Bitcoin ETF. 

Bitcoin performed well in 2023, with a notable price increase in the year’s final four months due to high hopes that the SEC would approve a spot Bitcoin ETF. But the market is also watching April’s scheduled “Bitcoin halving”, which has historically resulted in price increases.​

Regarding gold ETFs, since their launch, they have revolutionized the gold market. Following a pair of marginally negative years in 2021 and 2022, the GLD ETF, a proxy for gold investing, increased in value by almost 13% in 2023 . This implies that gold ETFs may see a resurgence or stabilization. Historically, gold exchange-traded funds have transformed the gold market and significantly increased gold prices.​

Conclusion 

Both Bitcoin and gold ETFs are facing exciting times in 2024, with Bitcoin ETFs possibly transforming the cryptocurrency market and gold ETFs continuing to play a significant role in the investment landscape. 

Ultimately, the choice between Bitcoin and gold ETFs depends on investor preferences and risk tolerance; while Gold ETFs are a traditional and stable option tied to the physical commodity, Bitcoin ETFs provide exposure to a more volatile but potentially high-return digital asset, reflecting the evolving landscape of investment choices in the modern financial market. 

However, investors should understand these markets’ inherent volatility and uncertainties before making any substantial investments.

FAQs

What distinguishes Bitcoin ETFs from gold ETFs in terms of investment?

Bitcoin ETFs offer exposure to a digital, potentially high-return asset, while gold ETFs provide stability with physical commodity backing.

How do Bitcoin and gold ETFs differ in market volatility?

Bitcoin ETFs are known for high volatility and potential high returns, whereas gold ETFs typically exhibit more stability, acting as a safe-haven asset.

Can Bitcoin ETFs transform the cryptocurrency market like gold ETFs did for gold?

Yes, Bitcoin ETFs have the potential to alter the cryptocurrency market to a broader audience of investors and speculators, similar to how gold ETFs significantly impacted gold prices and accessibility.

What should investors consider when choosing between Bitcoin and gold ETFs?

Investors should weigh risk tolerance and preferences; Bitcoin ETFs suit those seeking high-risk, high-return opportunities, while gold ETFs are for those preferring stability.

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