Gold and Bitcoin are both on the rise. These are what you should know.
2020 has been a bumpy ride so far. Investors around the globe are witnessing volatile markets as a result of the changing economic and political developments around the world. From the US-China trade tensions, uncertainty around Britain’s future and the ongoing Covid-19 pandemic — financial markets are seriously impacted and certain countries are already experiencing a recession.
This has pushed investors to look for “recession-proof assets” that are uncorrelated to traditional market movements and economic fluctuations to protect their wealth. With this in mind, two assets have been the talk of the town and have demonstrated its ability to act as a hedge in volatile times — it is none other than gold and bitcoin.
The common belief is to hedge against a volatile market through gold — and this has proven to be a successful method time and time again. However, a new alternative is challenging gold’s position as a safe-haven asset. Since its launch in 2009, bitcoin opened up the gates for a new generation of digital currencies — which boast unique features that could make it a potential safe-haven for investors.
The Goodness of Gold
A safe-haven against market volatility
Historically, gold has maintained its value over time and built its reputation as a “recession-proof” asset class — largely uncorrelated with traditional market movements and economic fluctuations. The first factor that contributes to gold’s safe-haven status is its scarcity — gold has to be dug up from the earth and processed. It cannot be created like the issuance of new shares or printing more cash. In addition to its scarcity, gold is required as a material to make consumer goods such as jewellery or electronics as it is an efficient conductor of electricity.
Gold has hardly any correlation with traditional assets like currencies, and stock indices such as the Dow Jones or S&P 500 — meaning that this precious metal can help investors profit when there is a decline or correction in the stock market. In fact, gold usually performs well during market downturns because even if it doesn’t rise, an asset that remains static while others decline proves to be useful as a hedge. In addition, as more people flee stock markets and put their money in gold, the price will rise accordingly.
Gold has stood the test of time
With the investment demand for gold surging by 80% in the first quarter of 2020, many may see that gold is soaring only because of the COVID-19 outbreak. However, historical data shows that this shiny metal was already performing exceptionally before the pandemic started and has thrived in multiple market crashes over the decades.
In 2019, the price of gold increased by approximately 20% alone and performed exceptionally in times of economic volatility which was a result of last year’s economic and political volatility — from Hong Kong’s political situation, confusion around Britain’s future within the European Union and Brexit, as well as unsettled US-Sino trade ties, and deteriorating relations between Japan and South Korea.
Going back even further, historical data has also shown a similar pattern during the 2008 global financial crisis where gold thrived and outperformed other assets after the initial market turmoil. Gold’s historical ability to shine in tough market conditions have prompted a large number of major hedge funds to place their bets on gold, on expectations that central banks’ unprecedented economic stimulus packages during the coronavirus crisis will prompt devaluations in major currencies.
The ugly truth about gold
The biggest disadvantage of gold is the high premiums associated with transporting, storing and insuring this precious metal. The COVID-19 pandemic has increased the premiums even further as the transportation costs when moving physical gold have surged by approximately 60% due to the worldwide lockdowns, causing the premiums paid for precious metals such as gold to surge — Gold has never been so expensive to own and purchase.
A market that is exclusive for the high-net-worth-individuals
In addition to high premiums, gold has always been a negative-yielding instrument where investors have to pay to store, insure, and secure the asset — Meaning that owning this precious metal is often only in the reach of wealthier individuals, benefitting just a handful of investors.
As investors look to purchase gold to offset declining equities and cash, it is important to understand that obtaining gold traditionally is negative-yielding due to its high premiums. As such, investors are now exploring alternative solutions such as digital gold — which is backed by the stable and enduring value of gold, without the additional premiums associated with traditional gold.
The “new gold” — Bitcoin
Bitcoin halving — Decreased supply, increased demand
Bitcoin is like any other asset, in that it responds to the dynamics of supply and demand. As of last Thursday, about 18.4 million bitcoin were in circulation, meaning there’s only 2.6 million remaining up for grabs. With a lower available supply and a growing demand for the cryptocurrency — Bitcoin is on the path to command a higher price in the upcoming months. This trend was also apparent in the 2012 and 2016 halvings, where the price of bitcoin reached an all-time high within three to six months — as it became abundantly clear that at some point in the near future, new bitcoin issuances will come to a halt.
This halving is occurring at a time when governments are flooding the system with money, which will push more investors to purchase bitcoin to act as a safe-haven against inflation sparked by massive money-printing.
Bitcoin is Defi
Bitcoin is beyond the traditional banking system. It is DeFi — Decentralised Finance. Bitcoin is made up of large networks of computers. There are no central authorities controlling the Bitcoins. Given the nature of bitcoin @blockchain technology, where data is cryptographically secure, it is almost impossible to hack and alter the ledger. This gives the holder a unique ability to hold value and safeguard in his/her wallet in a personal wallet, making it ideal as a tool to store value.
Bitcoin as a blockchain-based cryptocurrency shares some properties with its gold counterpart. In fact, many have called bitcoin “digital gold” in the past due to its weak relationship with all other assets — stocks especially. Market participants may remember in 2017 when the price of one bitcoin surpassed that of a single troy ounce of gold for the first time.1
Things to know before buying Bitcoin
History of volatility
One major concern for investors looking toward bitcoin as a safe haven asset is its volatility. One need look only to the price history of bitcoin in the last two years for evidence. At its highest point, around the beginning of 2018, bitcoin reached a price of about $20,000 per coin. About a year later, the price of one bitcoin hovered around $4,000. It has since recovered a portion of those losses but is nowhere near its all-time high price point. Going beyond the past two years and all the way to the beginning of its creation in 2009 — bitcoin has always had a volatile trading history — from a 10% drop in 2014 as a result of the Heartbleed bug, a 22% price tumble in November 2019 and a recent 55% crash in March 2020.
On top of the overall volatility, bitcoin has historically proven itself to be subject to market whims and news. Particularly as the cryptocurrency boom swept up a number of digital currencies into record-high prices around the end of 2017, news from the digital currency sphere could prompt investors to make quick decisions, sending the price of bitcoin upward or downward quickly.
What you may not know is that Bitcoin was born in part as a reaction to that market panic and volatility of 2008. Investors who saw fiat currencies pumped into the banking system to save it, when those very banks appeared to have caused the crisis, grew frustrated. They sought out ways to insulate their savings from the political class in many ways, from returning to gold in large numbers to the invention of cryptocurrencies.
The valiant goal of Bitcoin was to make a digital asset that mimicked the best attributes of gold without its notable downsides (like the inability to make a piece of pure gold worth a penny or two that’s any larger than dust — a piece of gold the size of a penny fetches a few hundred dollars U.S. these days).
Unfortunately, Bitcoin hasn’t been around quite long enough to know how well it will fulfil its self-anointed role. For instance, we’ve yet to see how it will act during a market crash like 2008. Despite its roots, Bitcoin’s initial rise occurred in tandem with almost all other assets in the world, from the U.S. dollar to global stocks and bonds, rising to historic proportions in one of the longest bull markets of the modern era. Meanwhile, gold prices have dropped by one-third during that time.
With many fundamental legacy market indicators flashing incoming recession, Bitcoin market participants are pushing the “Bitcoin is digital gold” narrative. But the truth is that we don’t know if it really is yet.
“The Bitcoin market has only been around during a bullish economy, so we don’t know how it will perform during an economic downturn.”
In addition to ushering in a new focus on blockchain technology, bitcoin itself has tremendous baseline value as well. Billions of people around the world lack access to banking infrastructure and traditional means of finance like credit. With bitcoin, these individuals can send value across the globe for close to no fee. Bitcoin’s true potential as a means of banking for those without access to traditional banks has perhaps yet to be fully developed.
The new “Hybrid”
With the development of Ethereum blockchain technology, gold-back token opens up new opportunities by breathing new life into traditional gold. Unlike traditional gold, digital gold can be used in ways its predecessor cannot while bearing the same attribute as a good store of value.
Combining the best of both gold and blockchain technology — a new form of digital gold was created, also known as tokenised gold. Often seen as the oldest and most reliable “safe-haven” asset, gold has been brought onto the blockchain, allowing investors to enjoy the accessibility, transferability, and convenience of digital assets, as well as the stability of the precious metal.
Tokenised gold is divisible, transferable and spendable. Tokenised gold bestows Its holders the ability to spend or move gold in a borderless manner. The transaction is almost instantaneous and the fee to move gold is a mere fraction of the original fee for transferring gold.
Gold is no longer exclusive to high-net-worth-individuals. Tokenised gold is accessible to anyone with the internet and can be safely kept in an ethereum wallet. You do not have to worry about storage fee, audits and all the other miscellaneous costs associated with owning traditional gold.
Bridging the convenience of digital assets with the stability of the gold market is Digix, the world’s first smart-asset company using blockchain to account for the authentication and provenance of 99.99 percent investment-grade gold bullion. Digix is a pioneer blockchain company with the largest circulating volume of gold-backed tokens approved by the London Bullion Market Association.
Business-blockchains and the advent of regulated digital asset classes represent the next phase in global trade and finance. Blockchain is maturing and regulations are liberalising to the idea of tomorrow’s digital economy. Gold is no exception, it may change in shape and form, but its intrinsic value and recognition will continue to write the next chapter in our shared world history. It is an interesting point in time as we witness more applications of tokenized gold being developed with the advance of blockchain technology.
Disclaimer: This article is written to express my own opinions. It is in no way a piece of investment advice from Digix. Digix’s blog may contain statements and projections that are forward-looking in nature, and therefore, inherently subject to risk, uncertainties and assumptions. You are advised to take into consideration your own unique investment situation, objectives, risk tolerance and investment horizon in any investment decision.
Digix, incorporated in Singapore in 2014, is the blockchain company behind the world’s first gold-backed digital asset class. Digix uses blockchain to account for the authentication and provenance of 99.99% investment-grade gold bullions. Physical gold bars are registered on the blockchain, and every 1 gram of physical gold registered is pegged to 1 DGX token. The physical gold bars are kept in vaults located in Singapore and Canada.
Digix recently won the 2020 S&P Global Platts: Precious Metals Industry Leadership Award and was a finalist in the 2016 Singapore MAS Fintech Awards.
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