As 2020 started off, the Internet flooded with memes about the global apocalypse. Australian bushfires, Iran-USA conflict, coronavirus now. While the former provoked a wave of compassion throughout the world, the latter caused significant changes in the world’s economy. Within less than 2 months, Bitcoin added about 30% to its price. This allowed many to claim that the first cryptocurrency increasingly resembles gold, while others argued for the opposite. But where is the truth? In this article, we put together arguments from both sides so you could judge which of them looks most convincing to you.
First, a tiny introduction. When any kind of global uncertainty or catastrophe happens, people tend to start looking for a safe place where they could put their money to preserve them. Most often, people buy US Treasuries, gold, and the Swiss Franc. Basically, this happens because people believe in these assets and consider them stable and trustworthy. Because during such unstable periods, most of the other assets (like those at equity markets) start losing their price, while safe-haven assets stay the same or grow.
Econometric research shows strong similarities between Bitcoin and gold behavior. A study called “Is Bitcoin the New Digital Gold? Evidence From Extreme Price Movements In Financial Markets” was conducted at the Department of Economics of the University of Pretoria. Scholars combined equity markets with Bitcoin and found that “the correlation of extreme returns sharply decreases during both market booms and crashes, indicating that bitcoin could provide the sought-after benefits of diversification during turbulent times”. Similar results were obtained for gold. Authors claim that “both assets can be used together in times of turbulence in financial markets to protect equity positions.”
Bitcoin rises and correlates with gold amid global crises. A recent Bitcoin Volatility Report by Kraken demonstrates strong correlations of Bitcoin with gold and US treasuries following Iran-USA conflict and coronavirus outbreak. According to the report, the 1-month correlation for BTC-Gold went from -0.12 to 0.70, and a 3-month one — from 0.21 to 0.44. Thus, the authors claim that “Bitcoin continues to mature as an alternative asset class to traditional “risk-on” financial assets”. Something similar happened at the height of the US-China trade war: in 2019, Bitcoin even outperformed gold after new measures by President Trump had been announced. The reaction of gold was slower and lower.
Bitcoin supply constantly rises, but the price doesn’t fall. This is possible thanks to the positive money flow into Bitcoin. Since about 1,800 new BTC are mined every day, at least a $17 million equivalent must enter to match new supply on a daily basis. The same mechanics work for gold — new ounces are being produced, but the price keeps its level due to new fiat coming into the system. And the percentage of the emission is about the same for both assets.
Today, gold is the most common asset for hedging risks. Investors still show extreme interest in gold. However, according to Google Trends, the interest in Bitcoin as an alternative asset in the US is even higher. Globally, gold’s demand is mostly driven by the least technically developed countries. But as they evolve, Bitcoin may increasingly become a safe haven asset along with gold.
Bitcoin beats gold in transaction speeds. As a well-known crypto enthusiast Max Keiser argues, Bitcoin is a “uniquely self-settling asset”. Settlement in finance is a process of delivery of a financial asset to its buyer. And Europe and the US, settlement time may be up to 4–5 days. As Keiser says, Bitcoin doesn’t need any settlement time, because “the transaction and settlement are inseparable from one another — when the transaction hits, it settles”. “Moving BTC between wallets simply means updating a ledger”, which is way more complicated and lengthy in the gold and securities market. This is how the speed of transactions may be an advantage Bitcoin has over gold.
Gold has been a safe haven asset for millennia, while Bitcoin has appeared recently — so we cannot judge yet. Jim Powers, Director of Investment Research at Delegate Advisors, says “Bitcoin is not the new gold because the old gold still works just fine”. Similarities between Bitcoin and gold may really exist, but they do not prove anything yet, because the time span of such resemblance is too short yet to conclude.
Bitcoin depends on the Internet, while gold doesn’t. Gold has been traded through ages — at the times when not only the Internet but even any computers were not present. Jim Powers continues his thought stating that in case of any “end-of-the-world-style financial apocalypse” gold will still be available for holding and trading, while Bitcoin won’t. “Try buying a loaf of bread with Bitcoin if the Internet stops working”, — he says.
There’s just not enough data to judge; Bitcoin-gold similarity is exaggerated by crypto enthusiasts. If you look at the graph, you can see that the correlation between gold and Bitcoin can be inverse at some time spans. Craig Erlam, a senior market analyst, says that for Venezuela and Argentina, where the economy is unstable, Bitcoin may serve as a safe haven asset, but he is skeptical about the general case. He claims that the Bitcoin-gold correlation during the turmoil of January 2020 is not an argument. In Erlam’s opinion, crypto enthusiasts who desire to see Bitcoin as a globally recognized safe haven asset use any chances to confirm their statement disregarding other facts and logic.
As you can see, the list of cons is quite short. But this might be just because people tend to write less about cons in general. We are usually way more enthusiastic about bull runs and the price growth than about skepticism and market collapses. So, in our case, it could be possible that the voices of Bitcoin enthusiasts just sound louder. In any case, the question is still open, and the time will tell who was right.