When it comes to investing, scarcity is the key. Yes, there are assets that are abundant and still profitable but nothing beats a rising demand coupled with a limited supply.

Among scarce assets, there are 3 main classes — gold, real estate, and Bitcoin — the rest could be considered variations of the above.

Having to choose among these three is no easy task. Some investors select a mixed portfolio that diversifies risk while others put all the eggs in one basket.

Having to choose among these three is no easy task. Some investors select a mixed portfolio that diversifies risk while others put all the eggs in one basket.

Here are some of the pros and cons of these financial classes.

Here are some of the pros and cons of these financial classes.

Gold

Gold has been around for millennia, it is a beautiful rock, very stable, and durable, and has captured the collective imagination as God’s money. It is also very scarce and hard to mine which increases its value and serves as a future-proof guarantee.

Gold has been used as money up until the 20th century when it was replaced by fiat and was relegated to a mere store of value.

Due to the long gold history, it has become part of the collective subconscious as the epitome of value and when this happens, it usually means maintaining the status for a few more generations.

Pros:

However, gold also has many drawbacks.

Since it is difficult to secure, verify and transfer, most gold is kept by custodians — banks that hold the metal and give you a certificate of ownership.

These middlemen remove most of the strengths of the asset and affect its purity as a store of value.

Gold kept in custody can be rehypothecated 100:1 which means that your bullion is also sold to another 99 people, thus degrading the value.

Also, third parties are in control of the asset which means you are incurring counterparty risks.

When you claim your gold, it might not be available, permission might be denied, and it could be confiscated by the government.

If you are not really in possession of the asset, is it really yours?

There have been many cases in which access to the rightful owner has been denied by law and when that happens there is not much you can do.

Venezuela held a fair amount of gold in the Bank of England and was denied access by the UK government. And just like that, all that wealth was confiscated forever.

Keeping physical gold in your possession is not a good idea either because of the security challenges. All the advantages of gold disappear when kept by a custodian.

Cons:

Real Estate

Safe as houses, as the saying goes.

Housing has been a great investment for the last 50 years. It is tangible, with utility value, and scarce. It can also generate yields through renting.

Perhaps its most interesting quality is the ability to leverage. You can borrow to buy a house and that’s not necessarily true with gold or Bitcoin.

The fact that the real estate industry has been around for a few decades gives the mortgage industry the ability to trust owners and use leverage.

A house can also be rented out and produce yield or even pay the mortgage with the income.

If you are able to guess which areas are most likely to go up in price, after paying off the mortgage you have a precious asset and could sell it for a tidy profit.

Pros:

However, there are also cons.

What if your country, area, or economy doesn’t perform as expected?

Real estate is a 20-year bet, and I would not want to predict how the social, economic, or labor market will perform for the next two decades.

Will there be demand for big cities? Which countries are going to do well and which are going under? Will it remain an investment or downgrade to a mere place to live?

These are extremely difficult questions to answer, disruptive technologies change everything in a matter of years. What was once sought after is now obsolete and vice-versa. This risk should not be ignored when embarking on such a long journey.

Would you invest in expensive areas like Manhattan? I wouldn’t, New Yorkers are leaving in droves and who knows if they’ll come back. The world is shifting to remote working and there is no reason to think the trend is going to reverse. Why pay a fortune for a tiny apartment on 81st street when you can live in Puerto Rico and work online?

Also, demographics must be taken into account. People are not having anywhere as many children as before and this will have an impact in many areas.

Rich countries still rely on immigration but even this could dry out. Latam and Africa are seeing their birth rates plummet in the last few years.

Liquidity is also a problem. When there is a downturn in the economy, people tend to sell assets fast before they drop to zero and houses are one of the most difficult assets to get rid of.

Many people were forced to sell or lose their homes in 2008 and most haven’t recovered their money yet.

Cons:

Bitcoin

Most traditional investors regard Bitcoin as risky, unproven, and volatile. Fair points, however, Bitcoin is very similar to gold in many ways and improves some of the qualities of the yellow rock.

Bitcoin is very scarce with a high stock-to-flow ratio but also has an extremely predictable monetary policy.

Due to the BTC protocol, the maximum supply is capped at 21 million and every day 900 Bitcoin get mined. This inelastic supply is independent of its market price and it is likely to lead to short squeezes in the future.

If gold increases in price by 100%, miners will mine more, simply because it is more profitable. This could lead to an oversupply and a drop in price.

With Bitcoin, this doesn’t happen. Whether Bitcoin is $1 million or $1, 900 coins will be mined today and no more.

Also unlike gold, Bitcoin is easy to verify, secure, and transfer. All you need is 12 words and you can travel with it freely across the world. Transferring Bitcoin costs almost nothing.

But perhaps, the main advantage of Bitcoin is personal sovereignty.

Owing an asset means that you are in total control of it. You don’t need permission to sell it or transfer it and you don’t need to incur third-party risk.

Bitcoin is possibly the only true private property in the world. Money in your bank, real estate, or gold is not really yours since you need permission to use it.

If an asset can be confiscated, regulated, or manipulated by a third party then it doesn’t belong to you, you are just borrowing from the estate, the bank, or the custodian.

It has taken millennia for humans to develop money that is truly independent and that is a great breakthrough in personal freedom and independence.

Pros:

Bitcoin also has some cons, of course.

Being a new asset class, it hasn’t got the proven history of gold or other traditional assets and this could mean that the market could one day decide to quit on it.

It is also very volatile and this is not acceptable for many investors.

Bitcoin has been attacked by many claiming it is a Ponzi, bad for the environment, vulnerable to hacks, banned by governments, and all that FUD.

All this is nonsense.

These known risks have been dismissed by experts time and again. However, there could be some hidden risks no one has seen yet. A black swan, a hole in the protocol that was missed and could destroy the whole network in seconds.

After 13 years of working flawlessly and thousands of experts watching it closely, this is very unlikely but who knows? The unknowns are unknowns for a reason.

Also, being a new technology comes with certain caveats. If you truly want to secure your Bitcoin in a sovereign way, you must follow some security protocols and procedures and this is not the average Joe’s cup of tea.

Keeping your private key in a secure place, moving your funds to a cold wallet, using multisign, and some other security measures make you ultimately responsible for your wealth and this makes many feel uneasy about this new investment class.

The question here is, do you trust your bank and your government, or would you rather trust yourself?

The way you answer this question will move the needle one way or another when it comes to investing in this new technology.

Cons:

Conclusion

These asset classes are sound investments. Scarce, growing demand, and a high stock-to-flow ratio make them a safe bet.

Whether you decide for one or another is perhaps a matter of mindset and how much you value technology as a changing force in the economic landscape.

What’s been around forever will probably stay around for a few more decades (gold). But also, when technology finds fertile ground, it becomes unstoppable (bitcoin).

“Nothing else in the world…not all the armies…is so powerful as an idea whose time has come.”

Victor Hugo

Risk is unavoidable and by shying away from it, you could probably end up losing all you are trying to protect.

Nowadays, with rising inflation, it is more important than ever to invest in anti-inflationary assets than ever rather than letting your wealth melt away.

Real estate is a sound asset, providing you choose carefully (which is not easy). I’ve no idea what will be the next sought-after area or country so I’ll pass on this one. But if you know please let me know as I would like to diversify my portfolio.

Gold is a bit too traditional for me and, since Bitcoin has the main characteristics of the yellow metal minus the cons, I’ve decided to stick with it.

But I suppose that a combination of these 3 assets is probably the best policy for a diversified portfolio, providing you do your homework and understand what you are getting into.

Scarcity is the key here. Never buy anything that can be made out of thin air. Avoid fiat money like the plague, and look for hard assets that can’t be printed away.

Not financial advice.