The Bitcoin-(BTC 0.40%)-versus-gold debate is heating up again after Wall Street investment bank Goldman Sachs (GS 0.66%) released a new research note documenting all the reasons it views gold as a better investment than Bitcoin. With Bitcoin down about 64% for the year, it's easy to see why Goldman Sachs has soured on the cryptocurrency. 

As Goldman Sachs argues, there is simply too much speculation and volatility surrounding Bitcoin. On top of that, the original cryptocurrency has failed to deliver on several of the key promises that were supposed to underpin its value proposition -- such as the idea that it would act as a hedge against inflation or extreme market volatility. Although some of Bitcoin's weaknesses have certainly been exposed this year, the question is still worth asking: Is gold really a better long-term investment than Bitcoin?

The case against Bitcoin

Right now, says Goldman Sachs, Bitcoin is basically trading like a high-risk, high-growth tech company stock. During bull markets, those companies can be fantastic investments based on the market-beating returns they can generate. However, during bear markets, investors typically seek out less risky assets such as blue-chip stocks and gold. So, as long as inflation concerns and recession fears hover over the economy, Goldman Sachs thinks gold is a safer place to put your money.

Bitcoin in Santa hat.

Image source: Getty Images.

In addition, Goldman Sachs argues that "non-speculative use cases" for Bitcoin simply do not exist. In contrast, there are legitimate use cases for gold that always generate demand for the metal. As Goldman Sachs derisively notes, Bitcoin is "a solution looking for a problem."

The case for Bitcoin

The primary argument for Bitcoin, of course, is that it has in the past delivered significantly higher annual returns than any other asset. Over the 10-year period from 2011 to 2021, Bitcoin was the top-performing asset in the world, delivering annualized returns of 230.6%. This far exceeded the performance of even the top high-growth tech stocks by a factor of 10. And over its lifetime, Bitcoin has returned more than 17,000% to investors. Contrast that with gold, which historically has delivered paltry annualized returns on a longer-term basis. From 2011-2021, gold's annualized return was just 1.5%. 

Until 2022, investors thought they were getting the best of both worlds with Bitcoin -- the potential for phenomenal annual returns plus a safe store of value. But Bitcoin delivered neither this year. Gold, on the other hand, delivered on its promise. In 2022, gold is basically flat for the year (down about 1%), while Bitcoin has collapsed. If you're adding gold to your portfolio, this is exactly what it is supposed to do during down markets. Thus, perhaps it's unfair to compare Bitcoin's annual returns with gold's annual returns. A lot depends on the broader macroeconomic context.

Goldman Sachs is also likely overstating the "no non-speculative use cases" argument against Bitcoin. While Bitcoin has never become the payments network that many people originally thought it would be when it launched back in 2009, there are signs that it is becoming a more viable online payment option. In part, this is due to innovative work at building faster payments layers (such as the Lightning Network) on top of the base layer of its blockchain.

As the digital economy grows, cryptocurrencies such as Bitcoin will play a bigger role in facilitating payments. From this perspective, physical gold will increasingly become irrelevant in a digital world. 

Bitcoin at $100,000?

There is a case for Bitcoin to reach $100,000 from today's price of about $17,000 within the next five years. That's not me saying it -- it's Goldman Sachs. Flash back to January 2022, when the crypto market had not yet imploded, and Bitcoin was trading at close to $43,000. Goldman Sachs argued that it was eventually going to displace gold as a store of value. Back then, Bitcoin only represented 20% of the "store of value" market, but Goldman Sachs predicted its share could jump to 50% within five years. That growth would, over time, drive Bitcoin's price to the $100,000 range.

When you start doing the math, things get really interesting. Even if you concede that Bitcoin's only worth derives from its ability to act as "digital gold," it's possible to arrive at some fairly aggressive valuations for Bitcoin if you assume that it will eventually replace gold as a "store of value" asset. For example, legendary Bitcoin bull Michael Saylor has calculated that each Bitcoin should be worth $500,000 within 10 years, based on current data about the physical gold market and the maximum number of Bitcoins that will ever be in circulation (21 million).

Drop gold, buy Bitcoin

At the end of the day, I think Bitcoin is a better long-term buy than gold. Even with all of its volatility spikes, it continues to deliver impressive returns over a sufficiently long time horizon. It's hard to argue with a 17,000% return. Granted, we probably can't expect Bitcoin to return the same percentage over the next decade. But if Bitcoin rises from today's price to $100,000 (the price predicted by Goldman Sachs), that represents a return of nearly 500%. I'll still take that. 

That said, in the current macroeconomic environment, I can see why some investors might prefer the relative safety of a trusted physical asset like gold. From a portfolio diversification perspective, gold can provide something that Bitcoin can not. 

Moreover, I can see the merits of the "past returns are not indicative of future returns" argument. Just because Bitcoin has generated eye-popping returns in the past doesn't mean that it can do so again in the future. Remember -- for much of its early history, Bitcoin did not have any credible competitors, so that certainly helped Bitcoin's early run. Bitcoin launched in 2009, while Ethereum only came onto the scene in 2015. Now, investors can choose from literally thousands of cryptos.

I'm bullish both short term and long term on Bitcoin. Although cryptocurrencies come with enormous volatility and price risk, Bitcoin's ability to bounce back from previous market crashes is particularly noteworthy.  It's time to drop gold and buy Bitcoin.