Some economists have been predicting a recession for the last couple of years now. They think the economic indicators are there, which is why they’ve been considering their options for weathering such a storm. The usual approach to turbulent times is to hedge against volatile stocks with gold. It’s worked in the past, but there’s another approach that’s proving to be a challenger to such tried and tested ways.
Bitcoin came into the world in 2009, the first of many new digital currencies. It’s still the leading cryptocurrency, and it bears many of the features of a normal currency, but it’s also got some extra qualities that might have some people considering the Bitcoin vs gold question during a recession.
The Golden Question
As a safe haven for investment, gold has several things going for it. Its inherent value as a metal used in jewelry and electronics, it’s stability and its scarcity—demand is always outstripping supply—are all pluses. New gold has to be mined and processed, which is a lot harder than simply printing money.
This means that gold’s value is not tied to assets like currencies, and stock indices. It was once tied to the dollar, until 1971, but no more. Ever since then, investors plow their money into gold whenever it looks as if the stock market is swinging too wildly. Gold can help cushion the blow or even turn a profit when the stock market corrects or declines by more than 10%.
Gold typically does fares well when there is a correction because even if it only maintains its value, that’s as good as a gain if everything else is declining. Also, when more people leave stocks and buy into gold, the price goes up.
Bitcoin’s Grand Entrance
Bitcoin is a cryptocurrency based on blockchain, and it’s a bit like gold in that its also only weakly connected to other assets like stocks. In 2017 one bitcoin became more valuable than one troy ounce of gold for the first time. In February 2020, bitcoin’s price was at $9,700.
Bitcoin is also like gold in that it has a limited supply. This is because Satoshi Nakamoto, the mysterious creator of bitcoin, set the maximum number of bitcoins at 21 million tokens. Bitcoin also resembles gold because it isn’t issued by a federal government or central bank. It’s decentralized, and its creation is down to the efforts of mining computers owned by individuals and groups. Their machines work to verify the transactions happening on the Bitcoin network and they are given a reward in bitcoins for doing this. But to make sure that they don’t flood the market, the Bitcoin protocol halves the value every once in a while, which means that the last bitcoin will be issued somewhere around 2140.
Bitcoin vs Gold Considerations
Gold has been coveted for thousands of years, while bitcoin is only a decade old, so is the young upstart better than the old hand?
Legality, Safety, and Transparency
The well-established structure for tracking, trading and weighing gold is a huge asset, making it difficult to steal, trading fake gold or adulterate the metal. Bitcoin is equally hard to corrupt since it’s encrypted by complicated algorithms. Unfortunately, though, there isn’t yet a similar infrastructure to guarantee its safety. For example, the popular exchange called Mt. Gox disappeared along with around $460 million worth of user bitcoins. The legal ramifications of that disaster are still being worked out years later, but since bitcoin as difficult to track it’s rarely the case that anyone is prosecuted in the wake of such scandals.
Bitcoin vs Gold? We’d say gold winds in this case.
Bitcoin and gold both have a finite supply (at least on earth—gold comes from supernovae). The bitcoin vs gold conundrum is evenly balanced in this case.
Gold has had decorative uses the centuries and then more lately it’s found applications in dentistry, electronics, and more. In the bitcoin vs gold struggle, it would appear that bitcoin can’t boast comparable attributes, but in fact, much of the world’s population doesn’t have access to traditional banking and credit, and bitcoin can help them transmit value around the world that very little cost. This aspect of the currency has yet to be fully developed, but the potential is there.
You can get cash for gold more easily than you can get cash for bitcoin. In the few exchanges that permit fiat withdrawal, all have daily limits, which means that bitcoin is less liquid than it could be. Bitcoin’s market is limited whereas everywhere you can find someone in the market for gold. The bitcoin vs gold question leans towards gold on this one
Bitcoin’s safe haven credentials are highly questionable as it’s proved itself to be very volatile. At the start of 2018, bitcoin it close to $20,000 per coin, and a year on it was down to $4,000. It since climbed back to close to half of its peak value, but there are no guarantees that it will ever regain that level of value.
Some of its swings in value come from the whims of the market. The cryptocurrency boom dragged a number of digital currencies in its wake, inflating their prices towards the end of 2017 and sending them tumbling after. It seems as if the news of the day can send any of them booming or soaring at a moment’s notice.
With this very much in mind a wave of alternative cryptocurrencies has appeared with the aim of providing a more stable alternative to bitcoin. They’ve been dubbed stablecoins, and one example is Tether. It’s linked to the U.S. dollar in just like gold was in the 70s. So, from an investor’s point of view, the safe haven out of bitcoin vs gold seems very clear, but there may be other safer crypt alternatives that they wish to consider.