The start of the new decade brought with it much hope and positivity for the industry ahead — increased institutional interest in the space, clearer regulation, the launching of the world’s first CBDCs, and upcoming prices rallies to a height that would make 2017 look insignificant. But when on the third day of the year you wake up to see the #WWIII hashtag trending on Twitter, I was one of many who wondered if the world would truly respond to that optimism.
Yet, out of this turmoil, a spark of global interest was lit anew on the hotly debated topic of Bitcoin’s correlation to Gold, only this time to burn with greater fervor. Already many — myself included — have written about Bitcoin’s safe haven-like behavior in times of political or economic turmoil. Amongst the many cases pointed to, one of the most particularly illustrative has been the coin’s price action throughout last year’s raging economic war between the United States and China. However, it was new events in January that suddenly appeared to eclipse all others — those of the U.S. — Iran tensions and the death of major general Qasem Soleimani.
Unless you’ve been living under a rock, chances are you’ve heard the news of the unexpected U.S. drone strike near the International Airport of Bagdad in early January which took out Iran’s second most powerful man, fueling fears throughout the world of another war in the Middle East. And with the U.S. and Iran as players, who knows how close to nuclear annihilation this would have come. At that time, the world almost seemed to be holding its breath, waiting for Iran’s response to the attack. Thankfully, now almost in March, we can all breathe a little easier knowing that the Middle Eastern state’s response did not serve to escalate tensions. The imminent threat of war has now dimmed in our minds.
Still, during the period of tensions, as one would expect, GLD’s price immediately jumped in response, peaking at $1,571 on January 7th — not surprising for the world’s most established safe-haven asset for past millennia. But what was especially noteworthy in both crypto and non-crypto communities is Bitcoin’s exhibition of a similar pattern, as it soared by over 20% the same week, climbing to a new high that broke it out the $7K range it kept oscillating for weeks. Drawing on this occurrence, the net suddenly overflowed with tweets, articles, and research showcasing Bitcoin’s correlation to Gold, asserting proof of the asset’s store of value quality the like of so-called “Digital Gold.”
Now, with time and distance, the hype is over, yet the question still stands — has gold truly gone digital?
So, let’s examine:
Though previous price actions may imply so, for Bitcoin to truly be considered a close digital alternative to gold, it would not only require it exhibiting safe haven-line behavior in times of turmoil but also showcase that it is a true store of value.
Looking along the line of their definitions, a ‘safe haven’ asset, is an asset an investor would choose to buy and hold during periods of market uncertainty or turbulence, because its value is expected to appreciate in such conditions, making it effectively a less risky investment. In the case of gold, a physical commodity, since its supply and value cannot be manipulated by government policies and decisions and it has maintained its value over time, it is a first choice for investors to hedge against market downturns. When an event occurs that drives down the market, its price appreciates in response to increased demand.
[*As a side note, I found the story of how gold was chosen as the default element for currency use amusing. To be suitable, there are four qualities that an element must meet. First, it cannot be gas for obvious reasons of impracticality. When looking at a periodic table, that removes many elements. Second, it cannot be corrosive or reactive, (e.g. iron or lithium), eliminating another 38 possibilities. Third, I cannot be radioactive, for obvious reasons again, which eliminates two full rows on the table. Fourth, it must be rare enough to be valuable, but not so rare that it is impossible to find, bringing the total to 5 elements: rhodium, palladium, platinum, silver, and gold. The first two were discovered in the 1800s, too late for early civilizations to use. Platinum has a high melting point only attainable with modern furnaces, which would have made it impractical for earlier usage, leaving silver and gold. Both have been used as currencies, but silver tarnishes easily, leaving gold as the best and only choice.]
As the case of the U.S. — Iran tensions have demonstrated, Bitcoin has exhibited a safe haven-like pattern, additionally illustrated by crypto-research firm Messari’s chart of the coin’s price action during the period in question. But it wasn’t only trading volumes that were up that week — Google Trends also registered a growth in the number of “Bitcoin Iran” searches, especially on January 4th and January 8th, the days immediately following the U.S. strike and Iran’s retaliation respectively.
However, as previously mentioned, to truly be considered a viable alternative to Gold, Bitcoin would have to definitively be accepted as a good store of value, defined as an asset that maintains its value over time without depreciating, accordingly, retaining purchasing power in the future. Yet, despite the coin’s strong proponents — myself, again, included — the volatility it has displayed in its short history makes it a challenging argument in favor.
Furthermore, though observing a growing correlation between both assets in question at the beginning of January, market trends in the past week have further served to question whether we can derive any definitive conclusions on the subject at present. With disruptions caused by the intensifying spread of COVID-19, markets have begun to experience the full consequences of its outbreak, driving them down. Simultaneously, while GLD price is up, BTC instead turned downwards, dragging the crypto market alongside it, having lost 12% of its value as its tumbled from above $10K to $8.8K in a matter of days. Thus, though observing CoinMetrics’ BTC/GLD chart YTD indicates a growing correlation earlier in the year, it also suggests that perhaps the title of “Digital Gold” may still be a premature one.
Nonetheless, while skeptics may additionally cite concerns such as the difference in global market capitalization (Gold Market Cap: ~$8 Trillion/ Bitcoin Market Cap: $161B), or Bitcoin’s lack of underlying industrial use, current evidence inclines me to the conclusion that while Bitcoin has not fully turned gold digital yet, it has an incredible potential to do so in the future. Market Cap may be widely different, but Bitcoin is only 11 years old next to gold’s millennia.
Overall, the digital coin remains too young of an asset today — adoption is growing but is still nowhere near that of gold, with the industry overall only beginning to mature with developing regulation, increased institutional interest and state-level development of CBDCs. At present, too little data exists to accurately predict Bitcoin’s price trends in any specific scenario. Even in the case of an economic recession — though theoretically, its value would rise by virtue of its origin and design, can we truly claim it as a store of value without the experienced data to back it up? Still, a survey conducted in September by eToro, a social trading, and multi-asset brokerage company, found that 40% of American millennials (born between 1980–1994) would invest in cryptocurrencies during a recession.
By all instances, though not yet at that stage, Bitcoin’s capacity to become true digital gold is growing in tandem with its market maturity. Global adoption is far from being realized but is surely heading towards greater mainstreaming, which will prove to be a key contributing factor to the coin’s status.
In any case, Satoshi Nakamoto may become the first alchemist in history to have successfully created gold.