Can bitcoin replace your gold investment in times of trouble?

The traditional move for investors looking to hedge against stock volatility, inflation, and geopolitical concerns is to buy gold. The idea that gold is a storage of wealth that would protect against volatility has driven portfolio managers to keep a weighting of the yellow metal in their portfolios for centuries. However, in 2009, a potential challenger to gold’s hedging dominance rose in the form of bitcoin.  This has sparked a debate over the past couple of years as to whether the digital currency is fungible commodity to gold. We will look at the two assets in question and review their performance in times of stress to help answer this question.

Gold is a chemical element that has historically been sought after for currency, jewelry, technology, and other uses. Hundreds of tons of gold are mined every year. Gold has an established system for trading, weighing, and tracking. It is difficult to steal, pass off as fake, and the metal is difficult to corrupt.  Simply put, gold is the oldest continuously used form of money on the planet.

In the simplest of terms, bitcoin is a peer-to-peer virtual currency stored in a digital wallet. Bitcoin came about in a 2008 white paper by the coin’s pseudonymous creator Satoshi Nakamota. New bitcoins are generated by a competitive and decentralized computer process which is referred to as mining. In 2017 one bitcoin surpassed the value of one single ounce of troy gold for the first time Bitcoin provides investors without access to banks. Bitcoin is also difficult to corrupt due to its encrypted decentralized system and complicated algorithms.  It’s safety system though is a little more concerning as evident by the Mt. Gox hacking disaster in 2014. At the time, the bitcoin exchange was handling 70% of all bitcoin transactions when 850,00 bitcoins (approx. $450 mln in value) went missing.

There are certainly similarities. Bitcoin was designed to share many of gold’s unique properties. The two assets share plenty in common as neither is issued by a central bank or government, both are ‘mined’, and both are finite assets. According to Coin Central there is an estimated 171K metric tonnes of gold in the world and a total of 21 mln bitcoins which can be mined. But there remain differences on the investment front as evident by price action.

Bitcoin can be volatile as evident by the rally to $20,000 at the beginning of 2018 before we saw it crash back to $3,300 in January of 2019. It has since recovered approximately 35% of it’s losses. Over that period between gold would trade in a comparatively tighter range between $1160-1350 per ounce. Given the ‘bubble nature’ of that sell off it probably does not provide us with a clear look. Recall that January 2018 is when the Trump Administration brought the China trade dispute to the public which set off an avalanche of selling across all assets. The bitcoin bubble was burst and forced panic selling. Gold held steady over that period as it chopped around in the $1300-1350 area.

During the October-December stock market sell off the S&P would fall from 2900 to 2350.  Gold had settled at $1200 entering that period and would eventually rally 10% over that time frame. This is also when the latest bull market run in gold began. Bitcoin traded at $6700 at the start of October and would finish 2018 at $3300. There was certainly an aspect of tax loss selling in Bitcoin but it was discouraging to see the digital currency lose half its value. January of 2019 would mark a bottom for Bitcoin.

Equity markets would see a steady rise over the next 14-months with many hitting all-time highs in February of 2020. Gold would move higher with the markets as it pushed to $1691 by the end of February 2020. Bitcoin would prove to be more volatile running from $3300 to $14,000 in May before falling back to $9900 in February. Both gold and bitcoin would see aggressive selling in the early March 2020 window when margin calls forced selling across all asset classes. Both assets have since recovered most of these losses with gold eventually extending to fresh 7-year highs.  According to Coin Desk the performance of the asset classes in the first quarter of 2020 saw Gold rise +4% and bitcoin fall -11% (compared to 10-year Treasury Bonds, helped by massive Fed stimulus +21% and S&P -22%). 

Bitcoin, or at least digital currency, certainly has a future as the ability to allow billions access to banks provides allure. Younger generations such as millennials and Generation Z’ers are open to accepting digital currencies and the buying power of these two groups will continue to increase.  But this is not about bitcoin the investment but rather if it is fungible for gold for those looking for safety. Gold simply provides a better protection for investors as it is far steadier and has a longer history supporting its safe-haven claim. Gold is also more liquid as people worldwide are willing to pay for gold while bitcoin must go through a limited number of exchanges that impose daily limits on withdrawal. This is key in times of panic when counterparty transactions rise in difficulty. Bitcoin will continue to gain on gold but for now, gold remains the better destination for investors looking for safety in troubling times.