In parallel with Bitcoin’s surge, a debate has emerged among the financial community: Will Bitcoin replace gold as a new safe haven?
JP Morgan is among the latest to compare Bitcoin to digital gold and suggests the flow of money into Bitcoin will be to the detriment of gold in its report predicting Bitcoin to hit $146,000 in the near future.
Bitcoin may well take speculative investment demand from gold, but will not replace gold’s portfolio allocation as the inflation and financial crisis hedge of choice.
Volatility aside, the two markets are incomparable in terms of market size, market dynamics and historical monetary significance.
Institutional investors have a new found appetite for cryptocurrencies from this year’s bull market, with more looking to invest in crypto derived assets.
More from this community are acknowledging that blockchain powered crypto assets are worthy of integrating more widely into investment fund mandates.
Indeed, these assets allow for greater portfolio diversification and enhanced portfolio risk/return ratios as a relatively un-correlated asset class.
As Bitcoin has surged to new record highs, many spokespeople from large institutions and major investment banks have weighed in on the debate about the future of the asset.
It’s true Bitcoin often experiences inflows in times of turbulence in traditional markets and the asset has become more appealing this year.
Investors have flocked to Bitcoin as a hedge against the low interest environment and Governments announced massive stimulus that would inflate currencies, mimicking the traditional safe haven of gold.
As a result, many Bitcoin bulls have labelled the currency “digital gold”. The standard riposte to this is that it has no intrinsic value, as reiterated by Bank of England Governor Andrew Bailey in December.
And, while true, this misses the point. Core to the debate that Bitcoin is the new gold is that people argue Bitcoin is easier to transact, and therefore superior.
Rick Rieder from BlackRock put forward the popular misconception that Bitcoin could replace gold because “it’s so much more functional than passing a bar of gold around”.
But that is not how gold transactions work anymore. Through the very same blockchain technology that Bitcoin champions, you can allocate and exchange physical gold and silver, so why would you opt for the significantly less stable asset?
People may readjust their portfolios to account for Bitcoin’s rise, but Bitcoin has lost its edge on gold. The two may draw capital in turbulence of traditional assets, but they remain very different. Bitcoin is still extremely volatile, whereas gold is a source of stability.
Ultimately, when the dollar fluctuates against gold, it’s not the price of gold moving, it is the dollar – gold is the constant and the only guarantee of security in the long run.
Investors may be looking to hedge inflation and the Bitcoin bull run may be tempting, but saying bitcoin is the new gold can allure investors into a false sense of security. After all, when bitcoin dropped in 2017 everyone ditched it.
Relative to weakening fiat currencies, gold will do what it has done for thousands of years and act as a safe haven. Experience has repeatedly shown us that gold is a stable source of value and is not comparable to Bitcoin.
For now, Bitcoin is not a sensible insurance against inflation and gold will remain the only truly safe store of value.
Jai Bifulco is chief commercial officer at Kinesis