Gold & Bitcoin — A Growing Relationship?

A combination of Blockchain & Gold could deliver the best of both worlds.

As an asset class, how does Bitcoin compare to physical gold mined from the ground? Is Bitcoin more like a commodity or a currency, does it represent an effective investment vehicle or is it an unpredictable trend?

Investors are always looking for asset classes to help maintain value and diversify their portfolios. Throughout history, gold has been seen as a strong investment to hedge with. As Bitcoin matures is there an opportunity that it could end up as an asset that could be compared to gold as a safe store of value?

The recent tensions between the United States and Iran saw both the prices of gold and bitcoin rise as investors sought to move their investments into safer assets. The tensions and concerns over escalating conflict helped to push gold to a seven-year peak and Bitcoin rose about 10%. Regardless of what regulators try to dictate these reactionary results are an indication that investors really do see both gold and Bitcoin as effective investment hedges in times of uncertainty.

Are gold and Bitcoin correlated? Analysists have computed the correlations between gold and Bitcoin from April 2013 until the present and it appears that the argument for a correlation between the two is not unfounded. One analysis showed that the two prices were correlated at 46.5%, where 0% represents uncorrelated and 100% is fully correlated. This correlation seems to have increased to 60.3% in 2018 and 70.8% in 2019 and the current trend is moving towards full correlation. It is important to note that this correlation was only for prices and does not represent the relationship between returns between the two asset classes.

Considering that the Bitcoin market is extremely new in comparison to the market for gold, could we see the Bitcoin market beginning to resemble more traditional asset classes in the future? Certainly, the Bitcoin market has plenty of scope for maturation. Some analysts are predicting that in the near term we could see Bitcoin testing its old highs at around $18,000. If this scenario is correct then the future of Bitcoin and other digital securities as an institutional asset class looks good.

The recent tensions between Iran and the United States have highlighted another emerging character of Bitcoin. In times of crisis having physical gold on hand is valuable as a liquid form of barter. Now with Bitcoin and other cryptocurrencies, the risk of holding physical gold during a crisis is reduced and replaced with digital transactions, which are however necessarily predicated upon having a working internet connection.

During the recent tensions, Goole Trends identified a surge in the search term “Bitcoin Iran”, which surged by 4,450%. Some commentators saw this boom in searches related to “Bitcoin Iran” as driving the rise in Bitcoin prices themselves. Although others felt this was a self-fulfilling prophecy based upon the narrative that Bitcoin was a safe haven.

Primarily the question of how similar Bitcoin and gold will become as asset classes for investment is based around the intrinsic properties they exhibit. Gold has always been an investment hedge against market volatility and geopolitical unrest. Bitcoin brings fast transaction speeds, the accountability of the blockchain and the security of distributed ledger. Both assets have strengths that are self-evident but what if it were possible to combine the two and deliver the benefits of both to the marketplace. The rapid development of security tokens is about to deliver hybridized products that may bridge the gap between gold and Bitcoin.

Security tokens are digital products but they can be backed by physical goods. Innovations are about to change the way we think about gold by using the precious metal as a way to back security tokens that are redeemable for bullion. Not only will these products further blur the line between precious metals and digital products as asset classes they will embody improvements that bring benefits from both camps.

A digital asset that is backed by gold is a strong starting point but this concept really begins to make sense when that gold can be redeemed in physical bullion. This process brings the inherent value of owning physical gold to the security tokens. However additional benefits are delivered through the digital nature of the security tokens. They can be traded continuously on a global market so they are extremely liquid. Additional security is afforded by the ability to reallocate tokens in the case that they are hacked or lost.

Perhaps in the near future technology will allow us to have the best of both worlds to strengthen our financial security. If we are to maximize our opportunities in this developing space it may be prudent to remember the words of Benjamin Franklin:

“An investment in knowledge pays the best interest.”

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