Gold Vs Bitcoin As Safe Haven Assets: A Comparative Research

Research
• May 16, 2024
Gold Vs Bitcoin As Safe Haven Assets: A Comparative Research

Since ancient times, gold has been considered the primary safe haven due to its scarcity, value, and stability. Nevertheless, the current economic system based on fiat currencies is relatively new, officially dating back to 1971, when the United States abandoned the Gold Standard convention and stopped holders of dollars from  exchanging them for gold at a fixed price..

So, in the last 50 years, we have begun to use a new financial and economic model based primarily on the reliance placed on central banks having relative autonomy in deciding how much money to print, with no maximum supply. Although the last 50 years have seen remarkable technological, financial, and social growth, some inherent problems are emerging that make governments and financial institutions fear that a new recession is approaching, which could further degenerate into a severe depression. Today’s global economy faces unprecedented instability due to geopolitical tensions, trade wars, and the aftermath of global pandemics. Inflation is increased, eroding purchasing power, while many fiat currencies grapple with devaluation. Furthermore, high national debt and unconventional monetary policies, such as quantitative easing, raise concerns about long-term financial sustainability. Given this background, we can see that in recent months (and years), investors have increasingly turned to assets considered safe havens, such as gold and, especially since the approval of the first ETFs in January 2024, Bitcoin. To be exact, in the past year, gold has appreciated by 20%, BTC by 40% (note also silver (+21%)). So, for Gold vs Bitcoin, who is the better safe haven?

Both Bitcoin and gold have their strengths and weaknesses as safe haven assets.

  • Gold remains the classic choice for conservative investors seeking stability and a long-standing store of value.
  • Bitcoin offers a modern alternative with the potential for high returns and a role in the digital economy, appealing to those willing to accept higher volatility and risk.

The better choice depends on individual risk tolerance, investment horizon, and belief in the future of digital currencies versus traditional assets. Let's explore this topic in detail. In this Trakx insight, we will learn about the historical significance, value preservation, volatility, security, liquidity, regulatory environment, and future outlook of both assets.

What is a Safe Haven Asset?

A safe haven asset is a financial instrument that theoretically should be partially immune to financial crashes and, conversely, could see its price appreciate during times of financial instability. To be considered a safe haven asset, it should tend to be stable, liquid, and have a low or negative correlation with risky and volatile assets. Gold is a great example of a safe haven asset, but Bitcoin potentially has all the characteristics to be one as well if volatility decreases and its price performance decouples  from the price of traditional financial assets.

Why are Safe Haven Assets Important?

To understand the importance of a safe haven asset, we can give a quick example. Consider that you live in Venezuela, and in 2010, you were rich because, even though you do not own real estate, financial assets, gold, or cryptocurrencies, you had the equivalent of $10 million worth of Venezuelan bolívars cash. Do you know how much they would be worth today? Exactly a value of $0.15. What if you had 50 percent of your assets ($5 million) in gold and the other half in cash? You would now have a net worth of almost $15 million: The value of gold compared to the dollar has performed a remarkable +153% since 2010, and the value of Venezuelan pesos has decreased by practically 100%. Impressive, isn't it? Now, imagine a similar process happening to the US dollar, the key currency in the current world economic system. What would happen? There are numerous inherent problems in the current system, and cyclically, economic and social crises are highly likely to occur. How to protect one's wealth? Gold and, recently, Bitcoin have come into the equation.

Current Economic Challenges

What are the main economic challenges currently?

Global Economic Instability

The global economy today is fraught with instability, driven by various factors such as geopolitical tensions, trade wars, and the lingering effects of global pandemics. These elements create an unpredictable market environment where traditional financial instruments can become highly volatile. Additionally, geopolitical conflicts and regional instabilities can disrupt markets, making it challenging for investors to find stable ground.

Inflation and Currency Devaluation

One of the most pressing concerns in the current economic system is the rising inflation rates seen worldwide. Inflation erodes the purchasing power of money, making it more difficult for individuals and businesses to maintain their standard of living and operational costs. Central banks have responded to economic crises by printing more money and lowering interest rates, which can lead to the devaluation of fiat currencies. 

Debt and Monetary Policy

High levels of national debt have become a significant issue for many economies. Governments have borrowed extensively to stimulate growth and manage crises, resulting in unprecedented levels of debt. For example, in the United States, the government debt has surpassed $34 trillion, and is rising at roughly $1tr per 100 days - a pace that raises serious concerns about fiscal sustainability. Unconventional monetary policies, like quantitative easing, have been used to support economies, but these measures can lead to long-term consequences, including higher inflation and asset bubbles.

Implications for Safe Haven Assets

Given these economic challenges, the role of safe haven assets is more critical than ever. Investors are looking for reliable stores of value that can withstand market volatility and economic uncertainty. Gold, with its historical stability and acceptance, has long been considered a safe haven. Bitcoin, although newer and more volatile, is increasingly seen as a digital alternative that offers unique advantages in the modern economic system.

By understanding the importance of safe-haven assets and the inherent global economic challenges, we can start evaluating their effectiveness as safe havens in protecting wealth during periods of economic instability.

Historical Perspective

Gold

Gold has been revered as a safe haven asset for thousands of years, dating back to ancient civilizations where it was used as currency and a store of value. Its physical properties, durability, divisibility, and scarcity, have made it an enduring symbol of wealth and stability. Throughout history, gold has maintained its value, especially during economic crises.

  • Ancient Times: Gold was used by the Egyptians, Greeks, and Romans as a medium of exchange and a sign of wealth.
  • The Great Depression (1930s): During this period, gold retained its value even as global economies collapsed, prompting many to hoard gold as a secure asset. (In 1934 the US government passed the Gold Reserve Act that banned public ownership of gold with the exception of jewelry and collectors' coins.) 
  • Post-World War II: The Bretton Woods system established the US dollar’s convertibility into gold, cementing gold’s role in the global financial system until 1971.
  • 2008 Financial Crisis: Gold prices surged as investors sought safety from the collapsing housing market and failing financial institutions.
  • COVID-19 Pandemic - Ongoing: Gold is hitting new highs as global uncertainty, wars, and economic shutdowns led investors to seek refuge in this traditional safe haven.

Bitcoin

Bitcoin, introduced in 2009 by the pseudonymous Satoshi Nakamoto, represents a revolutionary approach to wealth storage and a potential safe haven asset. Unlike gold, Bitcoin’s history is short but eventful, marked by rapid growth, extreme volatility, and increasing acceptance as a digital store of value.

  • Creation and Early Years (2009-2013): Bitcoin was initially valued at a fraction of a cent, with limited recognition outside of niche tech communities. Early adopters saw its potential as a decentralized, digital currency.
  • Mt. Gox Incident (2014): The collapse of the Mt. Gox exchange highlighted Bitcoin’s volatility and the risks associated with its early infrastructure.
  • Mainstream Attention (2017): BTCreached nearly $20,000 per coin, driven by speculative investments and growing mainstream awareness.
  • Institutional Adoption (2020-Present): Major financial institutions and corporations began to invest in Bitcoin, recognizing it as a potential hedge against inflation and currency devaluation. The COVID-19 pandemic and ETF approvals accelerated this trend, with BTC’s price hitting new highs and being compared to digital gold.

While gold’s historical role as a safe haven is well-established, Bitcoin’s history is characterized by rapid growth and increasing acceptance as a digital alternative. Moreover, from 2010 to the present, BTC has performed exactly 233 times better than gold.

Value Preservation

Gold

Gold has long been considered a reliable store of value, especially in times of economic uncertainty. Its ability to preserve value over long periods is supported by its physical properties and historical significance.

  • Historical Performance: Gold has maintained its purchasing power over centuries. For example, an ounce of gold could buy a quality suit in the early 1900s, and it still can today.
  • Inflation Hedge: Gold is often seen as a hedge against inflation. When fiat currencies lose value due to inflation, gold typically retains or increases its value. Historical data shows that during periods of high inflation, gold prices tend to rise.
  • Central Bank Reserves: Many central banks hold significant gold reserves as a strategic asset. This practice underscores gold’s role as a trusted store of value.

Bitcoin

Bitcoin's value preservation potential is a topic of much debate, given its relatively short history and high volatility. However, its design and recent performance suggest it could serve as a valuable digital store of value.

  • Limited Supply: BTC’s supply is capped at 21 million coins, which introduces a deflationary aspect, thanks also to the Bitcoin Halving mechanism. This accurate scarcity could be even more attractive than gold's finite nature.
  • Performance During Crises: Bitcoin has shown potential as a value preserver during recent economic crises. For instance, during the COVID-19 pandemic, BTC’s price surged as investors sought alternatives to traditional assets.
  • Inflation Concerns: Bitcoin is increasingly viewed as a hedge against inflation, particularly in light of expansive monetary policies. As fiat currencies face devaluation, BTC’s limited supply could enhance its attractiveness as a store of value.

Both gold and Bitcoin offer value preservation, but their mechanisms and historical data differ significantly. Both assets are seen as hedges against inflation, but gold’s historical performance provides a stronger foundation. BTC’s deflationary nature and recent adoption trends, however, indicate growing acceptance as an inflation hedge.

Volatility and Stability

Gold

Gold is renowned for its relative stability compared to other asset classes. Its price movements are generally moderate and predictable, which is why it is considered a safe haven.

  • Historical Volatility: Gold has exhibited low to moderate volatility over the long term. While it does experience price fluctuations, these are usually less extreme compared to stocks or cryptocurrencies. For instance, during the 2008 financial crisis, gold prices increased as investors sought a safe haven.
  • Economic Factors: The price of gold is influenced by various factors, including inflation rates, interest rates, geopolitical tensions, and changes in currency values. These factors tend to create steady, albeit sometimes slow, movements in gold prices rather than sharp spikes or drops.
  • Market Behavior: During periods of economic instability, gold's price tends to rise as demand increases. Its stability in such times reinforces its role as a safe haven.

Bitcoin

Bitcoin is known for its high volatility, which can be both a risk and an opportunity for investors. Its price can experience dramatic swings within short periods.

  • Historical Volatility: Since its inception, Bitcoin has shown significant price volatility. For example, BTC's price soared from around $1,000 in early 2017 to nearly $20,000 by the end of that year, only to crash to about $3,000 in 2018. 
  • Factors Influencing Volatility: Several factors contribute to Bitcoin’s volatility, including market sentiment, regulatory news, technological advancements, and macroeconomic trends. News about regulatory changes or security breaches can lead to significant price swings.
  • Market Maturity: As Bitcoin's market matures, some argue that its volatility may decrease. Increased institutional adoption, improved market infrastructure, and greater liquidity could contribute to more stable price movements. However, it still remains significantly more volatile than traditional safe-haven assets like gold.

When comparing gold and Bitcoin in terms of volatility and stability, distinct differences emerge- Gold’s low to moderate volatility makes it a stable asset for risk-averse investors, providing predictable price movements. In contrast, BTC’s high volatility presents both high risk and high reward, making it suitable for investors with a higher risk tolerance.

Security and Storage

Gold

  • Physical Storage Methods: Gold is often stored in high-security vaults or safety deposit boxes at banks and financial institutions. These methods ensure that gold is kept in a secure and controlled environment, reducing the risk of theft or damage. However, some investors choose to store gold in home safes. While this offers immediate access, it also requires significant security measures to protect against theft.
  • Security Measures and Costs: Professional storage facilities offer robust security features such as 24/7 surveillance, armed guards, and advanced alarm systems. These measures provide peace of mind but come at a cost.
  • Risks: Physical gold can be stolen or lost if not properly secured. Even with professional storage, there is always a residual risk. Additionally, selling physical gold can sometimes be cumbersome, requiring transport to dealers and verification processes.

Bitcoin

  • Digital Storage Solutions: This is probably the most secure method and involves storing Bitcoin completely offline, away from any internet connection. This can be done through paper wallets or hardware wallets.
  • Cybersecurity Risks: The security of BTCrelies heavily on the management of private keys. Losing access to private keys or being hacked means losing access to Bitcoin, which is irreversible.
  • Transparency, Immutability & Decentralization: Bitcoin transactions are recorded on a public ledger (blockchain), making them transparent and immutable. This reduces the risk of fraud and enhances security. Moreover, Bitcoin’s decentralized nature means that it is not controlled by any single entity, reducing the risk of systemic failure or centralized manipulation.

 Storing gold professionally incurs ongoing costs for security and insurance. Bitcoin storage costs are primarily upfront (hardware wallets) and minimal ongoing costs. Remarkably, BTC can be accessed and transferred instantly from anywhere with an internet connection, while gold requires physical transport and handling, which can delay transactions.

Liquidity and Accessibility

Gold

  • Market Depth: Gold has a deep and liquid market, with substantial daily trading volumes across various platforms, including commodities exchanges, over-the-counter (OTC) markets, and retail channels. Investors can access gold through various forms, such as physical bullion, coins, gold ETFs (Exchange-Traded Funds), and gold mining stocks. Each form offers different levels of liquidity and convenience.
  • Barriers to Entry: While gold is accessible, the initial cost of purchasing physical gold (e.g., bullion bars or coins) can be high. Smaller investors may find ETFs or fractional ownership schemes more manageable.

Bitcoin

  • Market Depth: Bitcoin also boasts a high level of liquidity, with significant daily crypto trading volumes across various cryptocurrency exchanges globally.
  • 24/7 Trading: Unlike traditional markets, Bitcoin trades 24/7, providing continuous liquidity and the ability to react to market changes at any time.
  • Low Barriers to Entry: BTC can be purchased in fractional amounts, allowing investors to buy as little as a few dollars' worth. This low barrier to entry makes Bitcoin accessible to a wide range of investors.

BTC transactions can be completed much faster and cheaper than gold transactions, which often require physical handling and verification. So, Bitcoin’s digital nature offers superior accessibility, particularly for small and international investors. On the contrary, Gold requires physical storage and transportation, which can pose logistical challenges.

Gold vs Bitcoin: Future Outlook

As we look to the future, gold remains a cornerstone of financial stability. Technological advancements have made investing in gold more accessible than ever before. Digital platforms and exchange-traded funds (ETFs) allow investors to buy and sell gold with ease, eliminating the need for physical storage. Moreover, blockchain technology is being leveraged to enhance the traceability and authenticity of gold, ensuring its purity and reducing the risk of fraud. These innovations make gold a more secure and convenient investment.

Market trends suggest that the demand for gold will continue to be strong as the devaluation of fiat currencies increases. However, gold faces potential challenges. The rise of digital assets like Bitcoin could pose a challenge to gold’s dominance as a safe haven. Younger investors, in particular, may be more inclined to invest in digital solutions rather than traditional assets. Furthermore, while gold is generally stable, it is not entirely immune to market forces. Significant economic changes or shifts in investor sentiment could impact gold prices, though its historical stability suggests that it will continue to be a reliable investment.

Bitcoin’s future is equally intriguing. Scalability solutions, such as the Lightning Network, aim to improve Bitcoin’s transaction speed and reduce fees, making it more practical for everyday use. The growing institutional adoption of BTC is also providing greater legitimacy and stability to the cryptocurrency. Large financial institutions and corporations investing in Bitcoin ETFs could drive long-term growth and reduce its infamous volatility. Additionally, as regulatory frameworks for Bitcoin become clearer, investor confidence is likely to grow. Clear regulations can reduce uncertainty and attract more institutional and retail investors, further solidifying Bitcoin’s position and decorrelating BTC from the traditional financial market.

Despite its promise, Bitcoin faces significant challenges. Regulatory risks remain a major concern, as Bitcoin’s future is heavily influenced by government decisions. Adverse regulations or outright bans in key markets could significantly impact its adoption and price.

Key Takeaways

In conclusion, at Trakx, we believe that the choice between gold vs Bitcoin as a safe haven asset depends largely on the individual investor’s risk tolerance, investment goals, and perspective on technological advancements. Gold provides stability, a proven track record, and widespread acceptance, making it ideal for conservative investors seeking long-term security. Bitcoin, with its potential for high returns and growing integration into the financial system, appeals to those willing to navigate its volatility and regulatory challenges.

Both assets have their place in the current economic landscape, and a balanced portfolio might include a mix of both (and other asset classes such as stocks, bonds, real estate, ..), leveraging the stability of gold and the growth potential of BTC. As the global economy continues to evolve, understanding the unique characteristics and future prospects of these assets will be crucial for making informed investment decisions. If you are interested in exploring Bitcoin-Gold hybrid investment solutions, check out our Digital Inflation Hedge Crypto Tradable Index!

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