A question that many investors are asking is whether they should allocate more of their capital to bitcoin or gold during periods of financial market volatility. More specifically, they’re asking if bitcoin or gold is the haven of choice for periods of market turmoil, as well as economic and geopolitical uncertainty.
The question of whether bitcoin is increasingly being used as a store of value by safety-conscious investors is worth addressing, for the growth of cryptocurrency investing will almost certainly have some spillover implications for the gold market. As I’ll explain here, however, it would appear that while bitcoin’s popularity is mushrooming, gold’s status as the preferred safe-haven vehicle remains unchallenged for now.
There are many pros and cons for either bitcoin or gold as investments. While bitcoin has been touted as an alternative currency, its wide fluctuations and (at times) extraordinary volatility prevent it from being a viable competitor with more conventional mediums of exchange.
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Instead of actual currencies, crypto products are more like stocks and commodities—especially given their ability to attract huge quantities of speculative interest from both retail and institutional traders. For now, at least, bitcoin will likely remain an adjunct to stock trading for its primary target audience, Millennials, who tend to be a bit more skeptical over traditional equity trading compared to older generations.
Gold has also been touted as money by its proponents (so-called “gold bugs”). There’s no denying, though, that gold is far from being an accepted payment medium in everyday transactions. Instead, gold is most commonly used as a means of preserving capital during times of fear and uncertainty, as well as being a worthwhile speculation whenever the U.S. dollar is weakening.
In terms of its ability to hold value over the long term, gold has few worthy competitors. In fact, it has been said that at any given time, an ounce of gold should roughly equate to the price of a good-quality men’s suit. Given that Armani wool suits can now be purchased for between $1,500 and $1,800, gold at just over $1,800 an ounce has indeed proven to be a worthwhile store of value.
To answer the question of whether bitcoin or gold is the preferred haven among safety-oriented investors, we have only to look at some market trends in the past couple of years. During most of 2019, for instance, gold prices were trending higher while bitcoin prices were in a slump as investors were worried over U.S.-China trade relations (particularly during the summer months), as well as the possibility that equities were becoming overvalued.
Moreover, during the height of last year’s coronavirus panic, bitcoin prices—as measured by the Grayscale Bitcoin Trust (GBTC)—trended mostly lower during the period between February and April 2020, while gold trended mostly higher during that time. Gold’s relative strength versus bitcoin is shown in the following chart. Here you can see the ratio of gold versus Grayscale Bitcoin Trust prices. Gold clearly outperformed GBTC during this period.
The period mentioned above was one of the most fear-induced, volatile market environments of the last several years. As such, it was an excellent test of whether bitcoin or gold is the better safe haven. But instead of confirming the widely held belief that bitcoin is a safe haven, it discredited the notion and instead confirmed gold’s long-standing status as a haven in times of turmoil is unchallenged.
A comparison of the Grayscale Bitcoin Trust’s performance since 2020 compared with the CBOE Volatility Index (VIX)—which is Wall Street’s favorite fear gauge—shines even more light on the safe-haven theory. If bitcoin was truly stealing gold’s thunder as a safe-haven vehicle, then we should be seeing a much stronger correction between a higher VIX and higher bitcoin prices during periods of intense fear. Instead, the correlation between GBTC and VIX is rather tenuous and, at times, inverted.
More recently, during the last three months when worries about inflation have been increasing, gold prices have trended decisively higher while bitcoin prices have been mostly slumping. This again demonstrates that worried investors choosing between bitcoin or gold are more apt to turn to gold than cryptocurrencies for protection against potential market volatility and uncertainty.
In the overall scheme of things, bitcoin definitely has a place in a long-term investment portfolio. But cryptos should be regarded as more of a higher-risk speculative vehicle for taking advantage of periods of dwindling risk aversion, rather than as a safe haven during times of economic turbulence.
Gold, meanwhile, should be considered as a worthy anchor for any stock portfolio and as a way to hedge against inflation (i.e. a weak dollar), as well as economic and geopolitical uncertainties. It’s upside potential as a momentum trading asset is much more limited than bitcoin’s, however, which means the question is not bitcoin or gold, but rather what should you allocate to each as there is a place for both assets in virtually any type of portfolio and regardless of one’s risk profile.