Table of Contents (click to expand)
- Save yourself from inflation an explanation about Bitcoin the digital Gold?
- Why Gold?
- Bitcoin: The Digital Gold
- Correlations between Physical Gold and Digital Gold?
- Recognition and Transparency
- Viability and Value
- Market Liquidity
- Economic Uncertainties and Volatility
- Could Bitcoin Replace Gold as a Safe Haven Asset?
Save yourself from inflation an explanation about Bitcoin the digital Gold?
As the world struggles to contain the spiral effects of the novel coronavirus on the economy, nations worldwide are reviewing their policies to maintain a measure of stability. Today, we have governments enacting what they term “quantitative easing” with goals of increasing the supply and circulation of money, thus in doing so creating some new bitcoin gold news for us. As both bitcoin vs gold narrative and the irony of being able to now buy gold with Bitcoin has your traditional cryptocurrency exchange buying and selling not only metals but currencies such as the USD/EUR and even commodities as they seek to diversify not only risk but their income on what was once only a place to trade your favorite digital currency. Both Metals and Crypto are being more and more seen as safe-haven asset classes to hedge against inflation by not only individuals but governments as well.
On the shorelines of these measures are institutional and retail investors searching for diverse ways to hedge against the looming financial crisis. While the more traditional way of circumventing volatility has been with gold or other safe-haven assets, a relatively newer method appears to be threatening its place. industry-leading exchanges usher in a new breed of cryptocurrency trading platforms allowing for a myriad of deposits and withdrawals mixing different digital assets, metals, and currencies together in this new world of trading.
Now, points are being made about digital currencies, especially Bitcoin joining the “safe haven assets” bandwagon. Though not without its issues in the past, Bitcoin has proven to be a unique representation of currency and an asset.
As a result, there is a school of thought that pitches Bitcoin and gold together as a safe place for investors to hide during extreme volatility. For this piece, we highlight the correlation between Bitcoin and Gold, as well as their place in the financial world by adjusting the high volatility nature of digital asset trading in both terms of profits and losses as well as real future intrinsic value for the digital investor vs the short term trader.
For ages, Gold has been considered as one of the most valuable and predominant means of wealth transfer. It has, through years of civilization, been proven as a unique store of value. Though replaced by relatively lesser metals due to debasement and inflation in time past, it was tethered to US Dollar till President Dixon discontinued the correlation in 1971.
As such, Gold remains one metal without links to any government-issued currency as well as other assets – which only served to increase its value. Today, its independence has gained it a place as a safe haven, even in the face of extreme economic uncertainties.
Investors looking to diversify or rein in profits despite sharp dynamicity in the financial markets have been found to move a part of their interests to gold and other independent assets.
However, while this had fuelled its high demand, supply, and circulation have been relatively low, especially in the face of market corrections and debasement policies.
Bitcoin: The Digital Gold
Bitcoin came in at a point when the financial world seemed to glean from technological disruptions. Much like physical gold, it was developed as an alternative but a unique payment system to foster financial inclusion in several parts of the globe. Inherently less heavy to carry around using a software digital wallet or even one of the many types of hardware wallets instead of a wheelbarrow to carry around.
Its lack of a central controlling authority and independence of other market entities fuelled its rise to the position of digital gold. True to form, Bitcoin undergoes a series of mechanisms for its availability.
Like gold, availability is made possible by a group of miners that combines computing powers to validate transactions on the network. The Bitcoin network represents an actual gold mine, and miners are rewarded with digital gold for every successful validation.
Bitcoin has a limited amount i.e., 21 million tokens for circulation, and to ensure a debasement does not occur or the market is not flooded, block rewards are frequently halved. Beyond providing the relevance of Bitcoin in the market, it also ensures that there is still enough Bitcoin to last for an extended period.
Correlations between Physical Gold and Digital Gold?
While the similarities between gold and Bitcoin lie in their scarcity or limited supply and practical decentralization, the narrative that Bitcoin might be replacing gold as a safe haven asset is not as prevalent as thought.
According to the multivariate extreme value research by the Economics department at the University of Pretoria, the combination of equity markets with Bitcoin shows a sharp decrease in correlations of extreme returns during steep market movements.
The study indicated that much like physical gold, Bitcoin could serve as a relief system for diversification during turbulent periods. However, several comparisons of the two assets showed layers of differences in their systems – some of which are highlighted below:
Recognition and Transparency
The uniqueness of a monetary system is its transparency. Gold has been established as a historical store of value with a unique and transparent tracking system. It is quite difficult to pass off fake gold, steal, or even corrupt it without due attention called to it.
Bitcoin, on the other hand, has only been around for a decade. Its blockchain-based background imbues it with transparency and immutability, which makes it quite difficult to compromise.
However, the safety infrastructures in place for both asset classes are relatively different. Bitcoin is a digitally-enhanced currency that makes its storage susceptible to breaches due to the sophistication of digital tools these days.
Furthermore, you’d find several measures of distrust levied against it due to the anonymity of this digital gold. The consequence of this unique feature remained that you can barely trace the location of missing Bitcoins, and it can be widely used for malicious purposes such as money laundering.
Viability and Value
As a store of value and an alternative payment source, both gold and Bitcoin has found different use cases in the financial world. Accordingly, gold has been the millennial currency with several applications that spreads beyond luxury assets like jewelry to electronics and other industries.
Bitcoin is not precisely lagging in this aspect. It has a unique baseline value, which has been fuelled by the waves of inclusion in banking systems and financial infrastructures. Bitcoin especially allows a transparent transfer of value with relatively low fees.
However, probably due to the time frame of its development and its decentralized nature, its potential as a system of wealth transfer has not been fully harnessed. In fact, a different school believes that due to its digital nature, it lacks the spunk and value that could be seen with gold.
Director of Investment at Delegate Advisors, Jim Powers, highlighted that Bitcoin couldn’t replace gold as a store of value due to the millennial validation. He stated that there is a certain reliance of Bitcoin on the internet that could lead to its collapse in the most extreme cases.
“In an end-of-the-world-style financial apocalypse, individuals can still hold and trade physical gold but try buying a loaf of bread with Bitcoin if the Internet stops working.”
Though both rare, gold is more accessible than Bitcoins. Like Jim Powers’ assertion, the digital nature and relative newness of the cryptocurrency placed a limit on its market liquidity.
It is easier to trade physical gold with fiat than Bitcoin. While there have been subsequent developments in availability, there are still limited exchanges to buy Bitcoin directly with fiat, unlike gold. As such, there are imposed restrictions on the liquidity of the Bitcoin market.
Gold, on the other hand, has its liquidity based on the availability of trading spaces. Its independence makes it such that even in the direst situations, people will continue to trade gold.
Economic Uncertainties and Volatility
Bitcoin has proven to be subject to market sentiments and, thus, is a victim of volatility. Bitcoin has been through a season of marginal highs and extreme lows. There was a point it peaked at $20,000, only to have it fall below the $4000 mark.
The instability of the market has been a concern for investors willing to diversify their portfolios in this respect. Arguments about the price volatility of the so-called digital gold point to the fact that it is still relatively new, unlike other fiat systems and asset classes.
Several Bitcoin enthusiasts indicated that there should be a near-stability in price if it sticks around for, say a new decade. Irrespective of this, Bitcoin’s volatility challenges its place as a safe haven asset.
This is because the physical counterpart, gold, hardly goes through the extremities associated with Bitcoin. It has independence which makes it relatively unaffected by the news and other market dynamics.
Could Bitcoin Replace Gold as a Safe Haven Asset?
Despite its limitations, Bitcoin has proven to be a resilient system of wealth transfer and has carved a path as a reliable investment option. Accordingly, there have been several developments in the crypto sphere, providing much-needed stability to the digital payments landscape.
However, despite the popularity of Bitcoin as a safe haven asset, it shows relatively little correlation with physical gold or ETFs. They are different entities and can be used accordingly to diversify investment options.
While they have similarities, Bitcoin poses way too much volatility for investors with low-risk tolerances and wealth protection as their fundamental goal. This, in every sense of the world, makes gold a safer choice for investors, especially in the face of economic uncertainties.