Global tensions are mounting. Bond markets are in turmoil. Equities are in a downward spiral. With headlines like these, what is an investor with “weak hands” supposed to do? The traditional answer has always been to head for nearest and dearest “safe haven” and wait until the storm passes. In prior times, “nearest and dearest” could mean anything from U.S. Treasury Bills, i.e., the U.S. Dollar, Gold and other precious metals, to the Japanese Yen. In today’s modern digital world, however, we have a new entry that is causing waves for commissioned sellers of traditional havens. It is Bitcoin.
One of the consequences of the Trump Tariff Wars is that the negotiations ignited global tensions, thereby renewing the fears that an economic slowdown or, more to the point, a recession was just around the corner. A repositioning of global investment decisions is not something new. It happens every time there is even a whiff that the “risk-off” alert alarm is beginning to stink up the surroundings. This time around, however, the shift in capital positions most likely began well before any of Trump’s boisterous tones.
Bitcoin has been on a tear since late January. Near-zero interest rate policies have driven investors to chase returns across the globe, but many of them have been attracted to the notion of cryptocurrencies and, more importantly, to its market leader, Bitcoin. It finally formed a bottom in December after eleven months of decline, known euphemistically as “Crypto Winter”. It has emerged from hibernation at $3,130 and then skyrocketed to $8,000, having tested strong resistance at $9,000 and pulled back to ranging mode. If you do the math, the BTC multiple has been nearly “2X”, for a return of 155% after the pullback. Try and find that return on a bond or stock or precious metal, for that matter.
Equity salesmen are used to these types of comparisons, but bond sellers have been complaining vehemently, and Gold Bugs have come out of the closet to scream foul, as if that might change the current dynamic. At the end of the day, the investment decision is one about risk and reward, not whether Gold is better than Bitcoin. Be advised that, if you bring this topic up in mixed company, you might be inviting an avalanche of abuse, if you are on the wrong side of the coin, so to speak. Gold Bugs tend to get very emotional about their precious yellow metal.
Perhaps, the reason for part of the poor association of terms when it comes to the notion of a “safe haven” is that, very early on in its development, Bitcoin advocates referred to their prized token as either “Digital Gold” or “Gold 2.0”. The unfortunate references still persist in the press today and stir old debates that really have no place in today’s financial pages.
What really sparked the BTC vs. Gold debate uproar of late?
The “pot stirrer” that provoked the recent outcry from the Gold community was a new ad campaign from Grayscale Investments. This firm is a trusted money manager that, among other offerings, has a private placement fund called the Bitcoin Trust, publicly traded under the “GBTC” call sign. You can buy these shares on the open market from your broker, but there is also a stiff premium to do so. In order to attract investors, a creative marketer for the company decided to lead with “Drop Gold” and substitute Bitcoin. The gauntlet was thrown down rather rudely, and a war of words ensued.
In these circumstances, the most outspoken Gold advocate or shill, if you prefer that characterization, has always been Peter Schiff, a respected stock broker, financial commentator, and radio personality, is usually the one that “fights the good fight” for Gold: “The ultimate irony in the #Drop Gold campaign is that you can’t mine Bitcoin without using #gold. This is just one of the many utilities of gold that Bitcoin promoters deny exists. But while they overlook gold’s obvious utility, they ascribe utility to Bitcoin where none exists. Scarcity is not enough. There must also be real value. There is also an infinite supply of cryptocurrencies. So they are not really scarce at all.”
These arguments seem a bit out place in the scheme of things, if intelligent investors are the audience that Schiff expects to address. Things went from bad to worse when Chris Mancini, an analyst of Gabelli Gold Funds, decided to jump into the fray: “Bitcoin has been corrupted because it’s a creation of man, and gold cannot be corrupted because gold is a creation of God… Global central banks are not going to buy bitcoin, so the Chinese central bank is buying gold and the Russian central bank is buying gold, they’re not going to buy bitcoin.”
The World Gold Council tends to be a voice of reason in these emotional disputes. Their contribution was to recognize that Gold’s trading volume per day is $150 billion, while Bitcoin is 100 times less. They cite $1.5 billion a day in Bitcoin volume, but what if they knew that, after eliminating “fake” volume, the real figure would be somewhat less than $1 billion per day? The point, which none of these official sponsors of Gold care to make, is that, if Bitcoin volumes are less than 1% of Gold, then why the excessive level of vitriol? It would seem that the impact of Bitcoin on Gold sales would be de minimis.
If comparisons really do matter, what are they?
If you search the net, it is easy to find various comparisons of the many attributes of both Gold and Bitcoin as investment “tools”. Bitcoin is still in its early stages of development, thus making several of these comparisons is like comparing apples with oranges, but for those diehards that need to know, here are a just a few items to consider:
If volume is the barometer of demand, then Gold wins hands down, based on stated stats. Depending on the source, there is anywhere from $6 to $8 trillion in Gold reserves on the planet, while the market cap of Bitcoin is roughly $125 billion. Gold wins again.
Bitcoin has already been classified as the most volatile asset class in history. That moniker might change over time, as the market matures, but volatility is a good thing if you are a professional trader. It is not so good for squeamish investors, so a toss up.
Cryptos are at a disadvantage in this case, again since the market is so young. After the next consolidation phase and natural growth, the situation may improve for Bitcoin, but, as for Gold, it is a mature market. Spreads are tight. Liquidity is rarely an issue. Gold is the winner, again.
Usefulness as a Hedge:
It depends what you are hedging against. If inflation and the dilution of fiat currency are the concerns, then both items are good hedges and “stores of value”, when conditions of inflation and dilution are present. If you are hedging an equity portfolio for return reasons, then Bitcoin might get a small nod, since it offers independent dynamics with a possibility of return. Gold might be a bit better than cash, but not too much. Bitcoin wins.
Gold had its meteoric rise a decade or so back. There is no reason for it to happen again, unless all fiat currencies tank at the same time, which would favor Bitcoin, as well. Bitcoin has more than doubled in value over the last four months. It left Gold in its wake. For potential appreciation, Bitcoin wins. Investors can short, if the opposite holds true.
Crypto exchanges have been compromised more times than we can count, but investors in Bitcoin do have ways to protect their holdings and their “keys”. Gold has been around a long time, and we seldom hear of broker or vault problems, but we do hear about “hucksters” with the intent to defraud. And yes, fraud is prevalent in the Bitcoin space, too. Let’s just give it a tie and move on.
Financial Safety and Stability:
Gold has been around since the dawn of mankind. It has stood the test of time. It is not going anywhere, and its reputation will not soon dissipate either. Its uses may be limited to jewelry and electronics, but people prize it across all cultures. In the digital age, Bitcoin has already won over a large audience of zealots, libertarians, and investors. BTC will eventually re-establish its usefulness at the point of sale, but that is down the road. The edge goes to Gold.
In this unofficial, superficial, and meaningless comparison, Gold wins by a 4 to 2 edge, not exactly a slam-dunk. Just as investors and traders have different personalities and tolerances for risk, Gold and Bitcoin will have differing appeals to the entire audience of hopeful investors.
Which do you prefer – Gold or Bitcoin? As we have noted, it is not a binary decision. There are compelling reasons to own both in certain situations, depending on your personality, portfolio, and appetite for risk. Comparing the two may provide valuable insights before making an individual investment decision, but do not fall for this “trap” because a marketing type or salesman suggested that it is the only way to determine what is best for you.
Intelligent brokers and exchanges are learning to offer both investments, if allowed by local statute, in order to appeal to a wider audience. No businessman wants to restrict his potential for a customer, unless he is already restricted. Commission-based salesmen often cross a line when attempting to close a deal, whether for Gold or for Bitcoin. Be careful when you invest. It is your money.
To be forewarned is to be forearmed.