Despite Comparisons, Gold and Bitcoin “Fundamentally Different” Stores of Value

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Despite Comparisons, Gold and Bitcoin Fundamentally Different Stores of Value
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Both gold and Bitcoin offer a way for savers to preserve wealth from inflation. Despite the recent Bitcoin frenzy that generated many comparisons between Bitcoin and gold, see why only one of these assets lets its owners sleep well…

The unprecedented levels of panic and uncertainty this year have brought forth a push for safe-haven assets that is likewise difficult to match. Gold posted consecutive all-time highs, pulling other precious metals along the way, as it climbed to $2,070 in August amid risk aversion and red flags from all corners.

The drive to find a safe-haven to not only store wealth but also protect one from various downturns has also reinvigorated the cryptocurrency market, bringing Bitcoin not too far off from its peak of nearly $20,000, last seen in December 2017. Three years ago, the comparisons with Bitcoin and gold were just as present as today. Writing on FoxBusiness, Jonathan Garber speaks with many analysts who argue that both assets hold no counterparty risk and offer investors a unique diversification opportunity.

Gold and Bitcoin “fundamentally different”

Yet as tempting as it may be to compare the two, they remain fundamentally different and will continue to fulfill different roles. As Peter Schiff, CEO of Euro Pacific Capital notes, Bitcoin’s primary purpose remains that of a currency, or rather an alternative to fiat ones. The token was created in the wake of the 2008 financial crisis to offer people a method of exchange that would be free from money printing and other forms of central bank manipulation.

Although many have since grown to view it as a store of value, Schiff points out that Bitcoin remains fundamentally tied to its currency status. Unlike gold, it doesn’t play an important part in jewelry and manufacturing, and its flexibility and utility are largely tied to the virtual sphere. In contrast, gold requires no internet connection or validation to either be used as payment, purchased or traded.

Ray Dalio, founder of the $98.9 billion Bridgewater Associates fund whose frequent outperformance has much to do with its big bets on gold, also hesitates to make comparisons between the two assets. In a recent tweet, Dalio highlighted Bitcoin’s infamous volatility and said that it makes the case for the token’s preservation of purchasing power more difficult to make.

Bitcoin’s volatility vs. gold’s stability

Bitcoin’s price swings may have brought gains to many, but its tendency to have abrupt downturns has caused just as much worry. While the top crypto has posted a nearly full recovery from its 2018 low of $3,200, such falls have and continue to trouble investors with a long-term outlook.

On the other hand, gold’s stability has always been one of its hallmarks, if not the most important one. Whereas 10% oscillations in the price of Bitcoin are a frequent overnight phenomenon, gold is exceptionally resilient to sharp downturns, yet also able to post massive gains during times of crisis. Even in its most bearish periods, gold continues to be an asset no investor would mind owning. Particularly in the case of physical gold, one can liquidate the asset at any moment and in any corner of the world without issue and receive most of their initial investment, if not more. This has been the case for centuries, and it’s difficult to envision a different scenario.

With a little over a decade under its belt, Bitcoin has plenty of miles to walk before it can offer its holders anything close to the sense of safety and security that gold does.

Correlation Between Gold and Bitcoin Hits All-Time High

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With institutions increasingly buying gold and cryptocurrency in recent months, the two assets are shining as decentralized hedges. Here’s what has changed.

The parallels between gold and Bitcoin have been there all along. Although both assets provide a decentralized hedge, the two have not often been directly compared due to Bitcoin’s extreme volatility and gold’s famous stability. Yet, much has changed since March. The unprecedented blow to the global economy has driven many to question stocks and even major currencies, as stimulative measures threaten to weaken the latter.

The biggest factor in the two assets becoming correlated has been the entrance of institutional money. Previously, institutions were reluctant to even consider exposing themselves to Bitcoin, in large part due to the nascency of the asset class. On the other hand, many fund managers either avoided gold or held a minimal allocation as they sought safe returns elsewhere, often in the form of bonds.

Now that most bonds offer a negative return, with the state and the currencies behind them looking shaky, institutions can hardly ignore gold’s outperformance this year, one that saw the metal rushing to a new all-time high and sticking around it ever since. In the current environment, the absence of havens and gold’s price appreciation has greatly expanded the scope of investors. With estimates that institutions will double their gold holdings in the near future, there is plenty of solid ground to expect more of this appreciation.

For Bitcoin, the entrance of institutional money has not only legitimized the asset, but also offered some much-desired stability. Now that institutions are essentially holding the reins of the crypto market, investors have less reason to fear massive price drops that linger for a prolonged period of time.

This has likely played a key role in the correlation between gold and Bitcoin steadily climbing over the past months to reach the highest-ever one-month point of 76.3% on September 19. A risk-off and risk-on asset are now close to moving in tandem, and there aren’t many indicators that this will change any time soon.

The uncertainty that the global economy faces has compelled institutions to review their course of action. The lack of counterparty risk that both assets boast has come into prominence as several countries have already experienced currency depreciation eerily reminiscent to that of Venezuela, while most nations are now asking their bond holders to pay a monthly fee, painting quite a bizarre picture. In fact, prominent funds like the Grayscale Bitcoin Trust are increasing both their gold and Bitcoin allocations, highlighting the shifting view of what makes a good safe-haven.

Bitcoin’s biggest benefit from these developments will likely come in the form of the aforementioned price stabilization, making investors across the board less hesitant to allocate some of their money to it. For gold, however, the story appears to be one of price gains. The metal’s outperformance this year cast a shadow on the 2008-2011 stretch, and its plunge during March’s broad selloff still left it above most assets. The growing distaste for risk and the sheer amount of money that institutional investors are set to pour in has driven many notable forecasters to expect new highs for gold’s price, both over the short and long-term.