Bitcoin and Gold — The Relationship
Given the nature of these assets, one might think that both Bitcoin and Gold would be positively correlated in any given market. Oddly enough though, analysts have suggested that Bitcoin and Gold actually have a slightly negative relationship (link 1, link 2). In my view, this perhaps indicates one of two things:
- The market is beginning to view Bitcoin as a better store of value than gold
- The market actually considers Bitcoin less of a safe haven asset and more of a higher risk investment, to be avoided in poorer economic conditions.
There is plenty of support for the first point (i.e. that Bitcoin is a better store of value). In fact, in 2016, the Winklevoss twins came out and argued that “Bitcoin was better at being gold than gold itself”, at least in this regard. There are a couple of stated reasons for this:
- Bitcoin has better scarcity — The global supply of gold has actually been rising by 1 to 2% over the last century. Although it has not increased at the same levels as the USD, Bitcoin is superior in this regard with its fixed and transparent supply.
“If you were to ask people what gold’s supply schedule looks like over time, they probably wouldn’t draw you something that looks like an exponential curve. With gold being sneakily inflationary, it’s not set up to preserve value in the way that bitcoin is.” — Chris Burniske, blockchain products lead with ARK Investment Management.
- Bitcoin is more portable and suitable in our digital age. A crucial element for a store of value is that it needs to be universally accepted and demanded over time; demand side support for a store of value is equally important as supply-side scarcity. Bitcoin, in its transferability across borders and digital nature, appears to be far more attractive in this regard than a clunky yellow piece of metal. (link)
However, there is some merit to the alternative view above (i.e. that the market still considers Bitcoin less of a safe haven asset and more of a higher risk investment).
- Gold is not reliant on internet access — Dave Kranzler of Investment Research Dynamics argues that gold’s advantage over bitcoin is that it’s not dependent on the operation of the internet, thus affording it a degree of protection from heavy-handed regimes that may control internet access. In fact, it is argued that gold has also proven itself to be of value even when governments attempt to restrict its usage or outlaw it completely. This happened in 1933, when President Franklin D Roosevelt implemented measures to prohibit and criminalize its possession in the US.
- Unlike Bitcoin, gold has a proven track record to instill trust and confidence. As Coindesk notes, while asset classes like Dutch tulips, Japanese real estate, dot-com companies and the US housing market have boomed and busted, gold has consistently plodded ahead, withstanding the test of time (link). Bitcoin has not been around long enough to have truly proven itself in this regard.
- Gold is possibly more durable. Although Bitcoin is understood to be immutable on the blockchain ledger, I agree with Robert Cookson in his article (link) that this may fall short of the virtual indestructibility of gold. Cookson lays out three concerns that Bitcoin may have where it comes to durability — (1) Hot wallets and exchanges are still vulnerable to hacking and stealing; (2) Losing a private key is much more likely to happen than losing a huge chunk of gold; and (3) there are many uncertainties over whether advances in cryptographic technology (e.g. perhaps via quantum computing) may threaten the much-heralded immutability of the blockchain.
At this stage, we can see that there is a swathe of opinions in the crypto and financial world on these topics. This is unsurprising given the fairly nascent nature of Bitcoin. As such, we would love to hear your thoughts on Bitcoin and Gold and your investment strategies concerning the two! Comment below or join the Tokenize Exchange communities to do so.