Traditionally, gold has been seen as a hedge against inflation during times of economic crisis. According to eToro market analyst Adam Vetesse, investing in gold “often seems less risky” than in companies that might fail during an economic downturn.
During the global financial crisis of 2008, strategist David Jensen wrote to then Governor of the Bank of Canada, David Dodge, regarding the importance of gold as a hedge against the impending crisis. However, he also noted the propensity for manipulation in the gold market, particularly in countries like Switzerland.
Soon after, the world suffered through one of the worst recessions since the Great Depression and millions of people lost money. At the time, Bitcoin didn’t exist, and investing in ‘safe haven’ assets like gold was not an easy option for most people. Now, as a result of the coronavirus pandemic, the world is once again facing a similar situation.
Recently, the U.S. Federal Reserve launched a $3 trillion stimulus package to counter economic effects caused by the coronavirus pandemic. However, rather than help taxpayers and consumers, the package has simply aided inflation.
In an interview with CNBC on May 12th, 2020, the CEO of VC firm Social Capital, Chamath Palihapitiya, noted Bitcoin has a hedge against further inflation. He accused the Fed of facilitating a divorce of the economy from the stock and bond markets before going on to note Bitcoin’s lack of correlation with traditional assets. “I still struggle to find anything that is as uncorrelated to anything and to everything else than Bitcoin,” he said.
Palihapitiya joins the voices of billionaire investor Michael Novogratz and hedge fund CEO Paul Tudor Jones, both of whom are looking to Bitcoin as a hedge against inflation. Following the coronavirus outbreak in early 2020, the price of Bitcoin crashed along with other stocks and indices like the S&P 500. Both enjoyed a mild recovery throughout April but from early May, Bitcoin broke away from this correlation and consistently improved while traditional stocks tapered off.
Value and rarity
Like gold, Bitcoin relies on miners to maintain the supply and has a finite supply which makes it both rare and valuable. However, despite this similarity, the price of Bitcoin is far more volatile than gold.
If you are investing in gold through a broker, you can be relatively certain your investment is safe. Bitcoin, however, should ideally be stored at home on a secure hard drive known as a hardware wallet. Investing in Bitcoin through a third-party remains largely unregulated but is beginning to move into the mainstream.
Despite improvements being made on a daily basis, Bitcoin exchanges still suffer from high fees, limits, and withdrawal delays. Gold has a much larger and well-established market that makes it easier to trade.
This is where Bitcoin trumps gold in almost every aspect. As a purely digital asset, it has far more use-cases online and can be used to make peer-to-peer payments. Bitcoin is almost more widely accessible to citizens from all walks of life.
Following the crash of 2008, the pseudonymous inventor Satoshi Nakamoto created Bitcoin as a means to give citizens control over their finances. It was specifically intended to challenge the overarching power that banks hold over the global economy, and soon drew the moniker ‘digital gold’.
The comparisons with gold are not without merit, as Bitcoin was specifically designed with several characteristics intended to mimic the properties of gold. Most notably, like gold and other minerals, Bitcoin has a limited supply which is capped at only 21 million BTC. Unlike gold, Bitcoin’s supply was intentionally limited to ensure that more BTC could not be arbitrarily ‘printed’ like traditional currencies. This limitation has been a key factor in its success and a characteristic that distinguishes it as a store of value rather than a common currency.
Another characteristic that makes Bitcoin similar to gold is the steady supply provided by miners. As with gold, miners must use their time and resources to procure BTC and the reward must be sufficient enough to incentivize them to keep mining. This property helps to regulate the price of Bitcoin, ensuring that it is always valuable enough to keep miners in profit. The system is carefully controlled by a predefined sequence of events called ‘halvings’, the third of which recently occurred.
Now, for the first time since its inception, Bitcoin is in a position to prove whether it can achieve its original purpose. As a store of value that is entirely independent of any country or market, it has the best possible chance of emerging from a financial crisis unscathed.
Disclaimer: The author of this text, Robin Trehan, has an undergraduate degree in Economics, Masters in international business and finance, and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries, and/or employees.
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