Unsure how purchasing gold and other precious metals compares to cryptocurrency — and how either option would align with your goals? Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital, says for some investors, longevity can be a key consideration.
“I like the crypto market,” DeMeritt says. “It has a tremendous amount of benefit for people all over the world; it can help you get away from the government printing of money. The one thing I caution people on is it doesn’t have a track record like gold does — gold, with a 5,000-year track record, and crypto with a 12-year track record, you’re just going to get a lot more track record out of the gold.”
How Crypto Works
A cryptocurrency-based system allows funds to be circulated using blockchain technology — instead of relying on the traditional processes a bank would use, such as a centralized database, a digital ledger automatically records transactions that take place.
The structure offers some benefits. Data originates from one source; it can’t be manually entered by multiple parties, which can potentially reduce the risk of duplication and other inaccuracies.
Transaction information undergoes a verification process and is stored like links, with each entry helping to strengthen the overall chain of data, making it more difficult to tamper with because a bad actor would have to also access and alter previous blocks in the chain. Different people can view the activity, but essentially, none of the involved parties are responsible for updating or managing the data.
The crypto market experienced notable growth for years. One estimate indicates the global cryptocurrency user base for bitcoin — arguably the best-known type of cryptocurrency; it was launched in 2009 — may have escalated by 190% from just 2018 to 2020. In the fourth quarter of 2017, bitcoin’s returns were 23.9%. The stock market provides an average annual return of approximately 10%.
The crypto market’s performance, though, hasn’t always been as robust. In November 2022, crypto trading platform FTX filed for bankruptcy. Prior to its collapse, cryptocurrency exchange Binance announced plans to cash in $580 million worth of FTT, the crypto token that had been offered by FTX. That set off a wave of customers trying to liquidate their crypto investments with other firms, which CNN Business compared to a run on a bank; some firms suspended withdrawals in response.
In December 2022, the Securities and Exchange Commission charged FTX CEO and founder Samuel Bankman-Fried in connection with “orchestrating a scheme to defraud equity investors” who had invested in the Bahamas-based crypto platform.
The SEC alleged Bankman-Fried, despite assuring investors the platform was a safe, responsibly managed endeavor, concealed the diversion of FTX funds to a separate, privately held crypto hedge fund, which was also given a line of credit that had been backed by the platform’s customers. In early November, a jury found Bankman-Fried guilty of seven criminal counts. Sentencing has yet to occur; he currently faces up to 115 years in prison.
A series of reports the White House released in 2022 highlighted some of the concerns the crypto market can present, including volatile pricing and misrepresented features and return possibilities. A 2018 analysis The Wall Street Journal conducted of 1,450 digital coin offerings found roughly 271 had transparency or disclosure issues, such as the inclusion of plagiarized documents.
FBI statistics suggest digital asset scam-related losses increased by 600% between 2020 and 2021.
In 2021, the collective value of all cryptocurrency reached $3 trillion. Yet by late August of 2023, that number was significantly lower, hovering at about $1.05 trillion, according to a recent Bankrate article.
Crypto market upsets, Kevin DeMeritt says, may be a reason some investors gravitate toward physical precious metal assets.
“A lot of these recent bankruptcies in the crypto markets, along with the crypto banks having to be bailed out, are going to make some investors leery,” the Lear Capital founder says. “Gold and silver will be a beneficiary.”
Precious Metals’ Past Performance
Gold and silver, due in part to their history of maintaining value even in the face of daunting economic scenarios, have become viewed as an asset that may be able to help offset declines other portfolio elements experience, according to Kevin DeMeritt.
In the past 200 years, for instance, National Mining Association records show gold prices have generally remained consistent or increased — at times, significantly, such as the noteworthy 101% rise in the producer price index for gold that occurred between 2008 and 2012.
Precious metals’ even-keeled performance doesn’t mean that they can’t deliver a favorable return on investment, though.
“One of the biggest misconceptions is that gold is this relic and doesn’t have this great performance record,” Kevin DeMeritt says. “It has dramatically outproduced the stock market. The misconception that gold can’t produce profits for people and it’s just more of a safety-type asset is completely incorrect. Younger people, especially, have this misconception about gold. They get excited about cryptocurrency, when in reality, gold has done extremely well.”
Following the events that took place in the crypto market last year, some investors, DeMeritt says, may be wondering about future regulatory changes and what impact they could have on cryptocurrency’s liquidity.
“The uncertainty in the market leaves a lot of investors nervous about how certain coins are going to be treated,” he says. “No one wants to wake up, and you just can’t sell a type of crypto coin. We’re starting to see younger people come into the market; they put a lot of faith in crypto, and it’s had a lot of volatility, so they want to diversify from digital to real gold.”
They aren’t necessarily moving their entire portfolio over, DeMeritt says — they may just take 30% of their crypto investments and purchase precious metals. (Lear Capital’s IRA portfolio comparison calculator can offer a visual example of the effect incorporating precious metals into your plans can have.)
If crypto was your first foray into the investing world and you’re considering ways to diversify your approach, Kevin DeMeritt suggests comparing how precious metals have performed against other assets in the past — and learning as much as you can about investing in general so any experiences you have with unpredictable assets don’t discourage you from investing at all.
“If you’re young, that is where you need to begin — because the worst part about investing is not having the education upfront,” Lear Capital’s DeMeritt says. “If you got into the crypto market at $60,000 and now it’s $30,000, if you’d anticipated that it was volatile, you’d say, ‘OK, I have the time to wait.’ But when you wake up and you’re shocked, it just throws you off — and the next thing you know, you just [say], ‘It doesn’t work, I’m not investing.’
