Can Bitcoin Steal Golds Safe Haven Crown?

Bitcoin

Shortly after cryptocurrencies began their recovery rally following the summer 2021 crash, an increasing number of market participants were predicting that Bitcoin could become the next major safe haven that investors turn to during times of turmoil.

Generally, safe havens are assets that are expected to maintain their value or even increase in value during times of high uncertainty. This could be triggered by a recession, rising geopolitical tensions, natural disasters, and similar events.

There are already a number of established and popular safe havens. In the FX space, traders tend to turn to the U.S. Dollar, Swiss Franc, and Japanese Yen during turbulent times. Bonds issued by major economies – such as the United States and the United Kingdom – are also seen as extremely safe investments.

The most famous and popular safe haven, however, is gold. The precious metal has been used as store of value for centuries and widely traded amongst traders with a strong reputation. Furthermore, while governments and central banks can heavily influence the value of its local currency, gold is a scarce commodity.

Cryptocurrencies are a relatively recent investment phenomenon. This alone makes many investors sceptical about whether cryptocurrencies can really establish themselves as safe havens.

Before we look at some of the arguments, let´s compare a few facts.

Gold currently has a market cap of $11.7 trillion. It is a highly liquid asset that is traded worldwide on the spot market and on various futures exchanges. The main hubs for gold trading are London, Shanghai, and New York City.

Meanwhile, Bitcoin has a market cap of $598 billion. In its early days, Bitcoin was primarily traded through various cryptocurrency exchanges. However, major financial institutions did not want to miss out on the trend and offer now Bitcoin futures – such as the one traded on the CME – as well as CFD contracts.

Over the long run, cryptocurrencies have a low correlation with traditional asset classes such as equities and bonds, which many investors see as a benefit. Bitcoin could therefore be seen as portfolio diversifier.

Many investors see Bitcoin as an attractive investment because it is decentralised and detached from the wider financial system. This could prove particularly attractive in countries that have an underdeveloped and fragile financial system or a highly volatile currency.

Bitcoin is attracting more and more attention from institutional investors, and new financial products – such as futures contracts and ETFs – are appearing that could boost the cryptocurrency´s popularity.

But can Bitcoin really take gold´s safe haven crown?

This appears less likely, especially in the near-term.

First of all, gold enjoys a reputation as stable and highly liquid investment. While gold does experience bear markets, like every other asset, the price swings are not as extreme. Transaction costs are lower, and cost-effective Gold ETFs are plentiful. Bitcoin – and most other cryptocurrencies – are simply too volatile.

Gold has a very long history and humans have an emotional attachment to it. Cryptocurrencies are a young asset class, and historical data is therefore limited. It remains to be seen how cryptos will react to a prolonged period of high inflation, a monetary policy tightening cycle that is already in motion and possibly a recession.

Crypto´s correlation to the stock market tends to increase during times of high volatility, which is the opposite effect most investors would have hoped for. Gold is still seen as the #1 inflation hedge.

These factors highlight that Bitcoin has still a long way to go to become a reliable safe haven like gold. That being said, Bitcoin – and cryptocurrencies – have been underestimated many times before.

Bitcoin

Bitcoin & NASDAQ 100 6-month performance. Source: TradingView.com

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.