A new idea has been floating around in Safe Haven Trading. Well, it’s not entirely new, but it’s quite controversial to say the least. For the longest time, particularly all of its life, Gold has been considered to be the purest form of safe haven trading. Investors flock to this shiny precious metal whenever there’s a strife in the investing world. At the end of the day, I’m talking about Gold, an instrument that is considered a store of value.
However, a new challenger has come along in recent years to test this hypothesis. I’m talking about Bitcoin. When Bitcoin first came into existence, it was something extremely risky, unknown, and uncertain. If there’s one thing markets absolutely hate, it must be uncertainty. Mainly, this is what labeled Bitcoin as a black sheep for quite some time and pushed investors away from it. However, as time progressed, so did the understanding of Bitcoin and what it represents and we’ve witnessed it’s meteoric rise from cents to tens of thousands of dollars.
Now, most of you might already know the answer to this question. Can Bitcoin be at the same level as Gold? To be clear, I’m not suggesting that Bitcoin is going to replace Gold; that’s definitely not going to happen. I’m simply raising the question as to whether Bitcoin is on equal footing with Gold or not. Let’s find out!
Where should I start when comparing these two instruments? Well, the first step is to check how the two instruments have fared since the beginning of the year. We can see straight away, without even looking at a graph, that Bitcoin beats the performance of Gold. Since the beginning of the year, Bitcoin has dropped to -30% performance and rose to 82.05% performance (as of today). This alone focuses on the returns and losses that an investor stands to make from investing in Bitcoin.
On the other hand, Gold has been on a steady climb since the beginning of the year, reaching 25.34% (as of today). The performance of Gold is quite subdued when compared to Bitcoin’s performance, but in that lies the crux of the issue. The movements in Bitcoin are so volatile that it deters investors from actually investing in this asset when it comes to safe haven investments.
The big movements in Bitcoin cause investors to fear the Cryptocurrency, and rightly so. In safe haven investing, investors are looking to keep their accounts safe from adverse market conditions, hence when investors look for stable movements rather than possible gains. The main purpose is to keep investments safe. Obviously, That’s where the name safe haven comes from. Investing in Bitcoin gives no guarantee that investments are going to be safe. Be sure that no investment is ever 100% safe, but one thing’s sure, Gold is safer from Bitcoin when it comes to investment security.
The Effect of Economics
One of the things that redeem Bitcoin in my opinion is the decentralized aspect of Cryptocurrencies. No one owns Bitcoin as a whole. What I mean is that no Central Bank or country owns any kind of Cryptocurrency so the effect of economics is actually lost on this instrument, giving it a bit of an edge over Gold in that aspect.
Since Gold is affected by the global economy and how things are faring in the top economies of the world, investors tend to keep an eye out on how things are actually going. That’s how they decide where they should invest next; whether to increase or decrease their holdings of XAU.
Here’s why I think Bitcoin has an edge over Gold, as mentioned earlier. Bitcoin isn’t concerned with how a particular economy is doing so it has a shield that Gold lacks. When the global economy is in a whirlwind and nothing is certain, Gold will absolutely be affected. Bitcoin, on the other hand, won’t be affected giving a sense of security to its owners.
Moreover, Bitcoin is based on pure Demand and Supply of the instrument with no noise happening around it that might affect the price of the Cryptocurrency. The amount of derivatives on Cryptocurrencies is quite low, when compared to the amount of derivatives on Gold.
Now with all the difference between Bitcoin and Gold, they do share common traits. The first trait is that Gold and Bitcoin come into existence through the processes of mining, which means that there is an associated cost when it comes to bringing these instruments into the market. This is in contrast to Central Banks who can print more currencies at virtually no cost and at any time they deem appropriate.
The limited quantity that is available at any point in time, is another trait that both Gold and Bitcoin share. Bitcoin can only have 21,000,000 Bitcoins in circulation and that can be mined. Same goes for Gold, there is a limited amount of Gold that can be extracted from the ground, and when that is done, there is no more Gold.
Another trait that Bitcoin and Gold share, is that they both are divisible into smaller quantities. 1 Bitcoin can be divided into 100,000,000 fractional Bitcoins, and Gold can be 1 ounce, ½ an ounce, 10th of an ounce.
Now you see, there’s one trait that Gold has that Bitcoin lacks, which is value, Intrinsic Value. Gold was a luxury good, a commodity, that was known throughout the world and virtually everybody wanted that instrument. So you know that people around the world would accept Gold, whether they wanted it or not, because they knew that it is something concrete. This gave value to Gold.
Bitcoin has no intrinsic value, since the only thing that Bitcoin is good for is actually buying goods and services with it, and not many people want to be paid in Bitcoin. This makes the Cryptocurrency lose its value as a contender to Gold. However, investors are finding some value in Bitcoin because of its economical immunity which brings some of its value back.
Bitcoin and Gold are similar in many ways, but that doesn’t mean they don’t have quite a lot of differences. Gold is the main instrument in safe haven trading and that is not going to change anytime soon and investors know this due to the fact that Gold has a high intrinsic value that I’ve spoken about which Bitcoin lacks. So, no, Bitcoin will not replace Gold as a safe-haven instrument.
However, the future is unclear if Bitcoin will have the same value as Gold, especially in such times of economic uncertainty.