Before COVID-19, many economists were predicting a 75% chance of a recession. Of course, with this pandemic, the first half of 2020 was rife with uncertainty and many investors began looking for ways to shift their investments into more stable safe havens. Safe havens are types of investments that are expected to retain or increase in value during times of market turbulence. They offer protection from market downswings and in the past were identified as precious metals, currencies, and stocks and today, cryptocurrency too.
Why is Gold So Precious?
Since gold is a physical commodity, it’s not impacted by interest rate decisions made by governments in the same way that printed money is. That’s why for years it has been considered a store of value. And unlike cars (for example), gold has historically maintained its value over time which makes it a great safe haven. When markets do go down for the worst or there is a threat of inflation, investors tend to pile their funds into gold and the value of gold increases. However, keep in mind that what’s a good safe haven in one period of market volatility may differ in another so portfolio diversity is key.
Why Bitcoin?
Back in 2009, an unknown person by the alias of Satoshi Nakamoto created a new currency – Bitcoin. One of its key characteristics is that it cut out the middle-man – meaning, goodbye banks. Bitcoins can also be used to buy merchandise anonymously and since it’s not tied to any country or subject to regulation (at least for now), international payments are easy and cheap. While the notion of a new currency, maintained by the computers of users around the world has been the punchline of many jokes, it has not stopped it from growing into a technology worth billions of dollars and what has also been termed as Digital Gold.
What’s the Difference between Gold and Bitcoin?
While gold has been around far longer than Bitcoin, it’s still important to keep the comparisons of the two in mind.
- Transparency, Safety, and Legality: Gold has an established and pristine system for trading, weighing and tracking. It’s hard to steal, pass off fake gold and to corrupt the metal. Bitcoin is also difficult to corrupt thanks to its encrypted, decentralized system and complicated algorithms but the safety of its infrastructure is not yet there. Case in point, the Mt. Gox scandal which resulted in hackers stealing the equivalent of $460 million from its online coffers.
- Rarity: Gold and bitcoin are both rare resources. The Bitcoin halving mining system ensures only 21 million Bitcoins are running in circulation. As for gold, it’s unknown when all the world’s gold will be mined from the Earth. So, both of their supplies are limited.
- Baseline Value: From luxury items like jewelry to specialized applications in dentistry, electronics and more, gold has been used in a variety of ways and is why it’s considered to have tremendous baseline value. Bitcoin also does as it brings about a new focus on blockchain technology. While it’s full banking potential to help the billions of people who lack access to a banking structure has yet to be reached, it’s starting to be accepted by major companies such as Tesla.
- Liquidity: They’re both involved in liquid markets where fiat money can be exchanged for either or.
- Volatility: Bitcoin and volatility go hand-in-hand. Bitcoin surged to an all-time high of $49,951 in February and has recently gotten boosts from large firms such as Tesla and Mastercard which are warming to cryptocurrency. Still, Bitcoin is more suspectable to market whims and news, whereas gold is perhaps a safer asset.
Bob Haber, investor contributor to Forbes, summed it up pretty well: “[Bitcoin] is liquid enough, securely custodied, and has a guaranteed limit on supply. Even gold can’t claim all of those. The increases in gold supply per year are generally trivial relative to the total above-ground supply, but it does increase in supply. The custody of gold is relatively expensive because you need big, secured warehouses with armed guards. And both gold and bitcoin are out of the hands of politicians and are the liabilities of no one. But gold is held by central bankers, who could manipulate its price if it suits their needs.”
Business Insider asked a few experts to assess whether they’d hold Bitcoin or gold and this is what they had to say:
Team Gold
"My vote would be for gold because it has thousands of years of a historical record as a store of value, has one-fifth the volatility of bitcoin, and doesn't face the same competition risk. The day that Queen Elizabeth trades in the five pounds of gold in her crown for crypto is the day I'll shift course." - David Rosenberg of Rosenberg Research, former Chief Economist and Strategist for Merrill Lynch Canada and Merrill Lynch in New York
"Gold and silver have been stores of value and mediums of exchange for at least 4 millennia in every civilization in every corner of the world. It has unmatched accessibility to people of all economic standing and technological knowledge. And gold is the ultimate currency of central banks, silver of the people. There is room for cryptocurrencies too since their digital nature is a fundamental difference from gold and silver. But that characteristic also ensures that cryptocurrencies will never replace gold and silver and will ultimately improve the metal's value." - Phil Baker, President and CEO, Hecla Mining Company
Team Bitcoin
"Based on the trajectory of this digital gold path and use cases globally, we believe bitcoin will be a mainstream asset class in the future. While gold has clear value and safety, the upside in bitcoin is eye-popping if it stays on its current course over the next decade." - Daniel Ives Managing Director and Senior Equity Research Analyst at Wedbush Securities
"Gold is, no pun intended, the standard if you want to measure purchasing power over millennia. The liquidity of gold has been consistent over time. Gold is what defines the X-axis of purchasing power over time. Bitcoin, while it shares defensive qualities with gold, has the additional attribute of being aspirational. What bitcoin would seem to possess is the potential to go up to multiples of a moonshot. No one thinks gold will moonshot. Bitcoin is also finite, unlike gold. No increase in demand can change that. There is zero elasticity." - JP Thierot, CEO of Uphold, a digital money platform
Team Both
"I would probably pick bitcoin but why not both? Gold and bitcoin have a very similar aspect to the portfolio. I would add gold as a diversifier. I would add bitcoin as a diversifier. The hedge is diversification. Bitcoin is a tool to get there. Bitcoin is a hedge to losing money to something stable." - Mike Venuto, co-portfolio manager of the Amplify Transformational Data Sharing ETF, a $1 billion ETF.
Given this information, we’re curious to know: Which team are you on?
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