Drop gold, buy Bitcoin?
I decided to title the article as the new slogan of the recent Grayscale campaign “Drop Gold, buy Bitcoin” not only because it’s quite catchy and sticky, but because during the following paragraphs I will be covering the main differences between those two assets as well as highlighting the role that Bitcoin currently has in the commodities market.
But why people trust in gold so much? Why gold has occupied an unprecedently status for over a millennium? In order to answer those questions, the inherent value of the metal must first be analyzed.
Gold has been used as a hedge since 1792 when the US decided to adopt a gold standard. Since that moment, the metal has had several functions in the global system. In the financial industry, the asset has been traded alongside the evaluation of key macroeconomic variables, such as inflation as well as contrasted with monetary policies of major central banks.
In the last financial shocks, such as the Asian financial crisis in the late 1990s and the US housing bubble in 2008, gold was the perfect storage of value for investors. Consequently, XAU prices rise along with the fear of global collapse.
In the Reuters’ infographic showed above, it is clear that the value per ounce peaked in situations of uncertainty such as the Soviet Union intervention in Afghanistan (1980) or the sovereign debt crisis in the Eurozone (2011). The correlation can be extended even to the stock market, as many investors flee to Gold’s safe haven each time the stock market crashes.
After reading all this, I can bet what you should be thinking. If your mind is already trying to plan the multiple ways in which you are going to buy gold in the next recession, it would be better to abandon the idea, as gold may not be the most attractive safe-haven when the next financial shock comes.
Between 2007 and 2009, when the financial contagion affected the whole world, investors did not have a clue about crypto because the first open-source code was not coded yet. The first code started to be recognized in 2011, when the Electronic Frontier Foundation began to accept BTC as a way of payment and Wikileaks spread the concept by accepting donations in the named virtual currency. Therefore, BTC couldn’t be used to hedge against a weaker dollar.
However, the game may be about to change. Bitcoin went from being a small experiment to one of the most recognized assets in the markets, currently having a market cap of $169 Billion USD. Now, if we compare BTC with Gold, the first asset has far better qualities and applications than the second one. Think about it for a second, which asset bring more benefits to the global economy? You may already know the answer…
Grayscale Investments discovered the answer to that question several months ago, that’s why they decided to launch the “Drop Gold” campaign in which the team invites traditional and visionary investors to move their funds to the digital currency.
Before evaluating the proposal of value brought by Bitcoin, let’s highlight the similarities between both assets first. Gold and BTC have earned legitimacy and respect as storage of value, as investors found those assets to be “durable and reliable”. Secondly, the two of them are scarce, meaning there are limited units of those assets.
Okey, so the moment has come to truly expose why BTC may outperform Gold in the next financial crisis or simply in the next decades to come. First and foremost, Bitcoin has far more utility than gold. From low-cost money transfer, to invest in early-stage startups and having a censorship-resistant alternative to store your capital… Bitcoin is the way to go in many ways.
Bitcoin, similar to other cryptocurrencies, enjoys a “verifiability” feature that allows investors to track their funds in real-time from almost anywhere. In addition, BTC is portable, meaning you only need your ledger or Internet connectivity to transact with the currency (which is better than carrying a gold bar of 438.9 ounces in your pocket). Regarding divisibility, BTC is easier to divide as holders could send fractions of it with a simple click, this will be different if you try to divide your gold bar!. And lastly but not least, Bitcoin is fungible. In other words, 1 Bitcoin is valued in the same way as another Bitcoin. In contrast, this does not happen in the commodities market, as there are different prices depending on regulators and brokers.
Without a doubt, digital currencies still have a long path ahead regarding legitimacy and adoption, but we are getting there! One of the aspects that scare investors the most is the huge volatility of the crypto market. BTC tends to surge and decline between 10% and 20% when the volume is high, while small-cap coins could easily drop more than 30% in a single movement. However, many analysts are starting to realize that the situation will slowly change in the following years, as global regulations and adoption will make the market a more mature one.
In the following chart made by LBMA Media Center, a huge reduction in volatility levels can be noted compared with Gold. In September 2011, BTC price used to surge more than 50% in each spike. Similarly, between 2012 and 2013, BTC rate kept moving at around 30% in every bull run. Now, it is clear that with time, volatility has been slowly reducing.
Similarly, the Bitcoin Volatility Index created by Biyvol.com, shows that between 2014 and 2019, the market has started to stabilize significantly, normalizing dispersion. In 2018 and 2018 specifically, BTCUSD volatility has dropped under 15%, meaning that the feeling of risk and uncertainty is decreasing. Theoretically speaking, with higher volatility, the cost of converting into and out of Bitcoin will decrease, attracting even more investors in the medium and long-term.
The conclusion is simple, gold may be the way to go for traditional and conservative investors, however, a large majority of them are moving from traditional assets to new alternatives. Gold is losing ground among millennials as its uses are limited and the returns could not even be compared with the return of the cryptocurrency market. Hype and speculations are huge barriers for BTC, but normality is no far away… and when this happens, BTC will gain more trust than ever.