For many years, investors with low confidence in the government’s ability to control the economy have put their confidence in gold. Throughout history, gold has been recorded as relatively volatile in the short term yet successfully able maintain a steady value in the long term. As such, it is and has always been considered to be a safe place to store one’s assets in times of crises.
The price of gold is known to “reflect global uncertainties” according to the Federal Reserve Chairman Ben Bernanke[1]. Records of gold prices indicate that the price of this asset has time and time again risen during uncertain times. Two prominent examples in the U.S. include 9/11 and the 2008 financial crisis. During these tumultuous points in history, gold prices skyrocketed due to lost confidence in banks and the government. Consequently, gold became a place where investors could store their money safely in the long term.
As well as serving as a means of storing assets, people have been using gold as a form of currency for five thousand years[2]; although its use for consumer transactions is dwindling along with its liquidity.
Unlike other forms of capital, gold is a finite resource and cannot be manufactured – unlike cash. The supply of gold is determined by how much of it is mined. There only exist scarce amounts of gold in the world, limiting the amount of gold supplied regardless of demand[3]. As a result, gold can’t be directly subject to changing price levels or inflation because the exact factors that contribute to the price of gold are largely unknown to most economists. As stated by Ben Bernake, the Federal Reserve Chairman, “No one really understands gold prices”[4]. What is known is that the price of gold is often influenced by monetary policy. Due to its consistent value, gold is often used as a hedge to protect against devaluation of the dollar.
While many people still chose to store their money in banks, real estate, or simply cash; many still believe that there has never been anything quite like gold to rely on… until early 2009.
Meet Bitcoin, a digital cryptocurrency created by the pseudonymous Satoshi Nakamoto[5]. Unlike gold, Bitcoin exists entirely on a digital public ledger where its balances are kept. Since 2009, a single Bitcoin has grown to be worth roughly $30,000 by the end of 2020[6].
Many investors believe that this cryptocurrency is the future of safe haven assets. Given that Bitcoin requires low transaction fees and is not regulated by the government, it is sometimes seen as a new substitute for gold. A key difference to note, though, is that gold is considered a commodity while Bitcoin has its very own classification[7].
Bitcoin and gold are similar due to how investors have begun to flock to both of these assets in times of uncertainty. In other words, they are safe haven assets. While stocks and bonds are largely based on earnings and interest payments[8], prices for gold and Bitcoin seem to be driven by factors based on hopes that they gain value in the future. In essence, gold and Bitcoin can be what economists call ‘speculative assets’.
While both Bitcoin and gold exist in the market as “safe-haven” assets, one question remains: which is the more reliable investment?
Although Bitcoin and gold have been proven to be similar, there are also some key differences to take into account. Bitcoin is completely digital and hence, can only be stored through a network called the blockchain: a public ledger of transactions[9]. The idea of assets being stored in a ‘cloud’ of sorts is concerning enough for many to stick with putting their trust in gold.
On the contrary, others have chosen to invest in Bitcoin during difficult times rather than the usual gold. Though Bitcoin is still maturing, many economists believe that if this cryptocurrency continues to grow at its current rate, it could become even more reliable than gold due to its prospective liquidity in the future[10].
Returns on S&P 500, gold, and bitcoin can all be demonstrated by the following chart.
Although Bitcoin is the most volatile asset, the return on investment is considerably higher than that of gold. Greater adoption of Bitcoin by financial institutions could lead to it becoming a more stable asset, suggesting that it could be beneficial to move one’s safe haven assets to Bitcoin in the future.
It is evident that Bitcoin is a more radical investment compared to the traditional gold. Stephen McKeon, an associate professor at the University of Oregon, states that “The case for crypto is that it is poised to disrupt a large segment of the financial services industry[11]”. That is to say, Bitcoin is challenging the current financial system and attempting to replace centralized finance. For some, this idea alone is enough to believe that Bitcoin is the future and therefore a smarter investment.
After careful consideration, it seems as though Bitcoin still has not matured enough in order to become as safe of an asset as gold simply because of its volatility in the current market. With that said, there is no doubt that Bitcoin is changing the way the world invests and could potentially disrupt centralized financial systems indefinitely. As of right now, there doesn’t seem to be enough knowledge to know exactly where Bitcoin is headed; if it continues in the same trajectory, cryptocurrency could change the way people invest in time to come.
[1]“Why Do People Buy Gold? Reasons to Buy Gold.” U.S. Money Reserve, 18 Oct. 2019
[2] FocusEconomics. “Who Discovered Gold?: A History of Gold & the Gold Standard.” FocusEconomics | Economic Forecasts from the World’s Leading Economists, 26 Apr. 2016
[3] Reiff, Nathan. “Should You Buy Gold Or Bitcoin?” Investopedia, Investopedia, 28 Aug. 2020
[4] “The Difference Between Gold and Bitcoin.” FXCM Markets, 3 Oct. 2019
[5] Frankenfield, Jake. “Bitcoin.” Investopedia, Investopedia, 18 Feb. 2021
[6] “Bitcoin Historical Prices.” Bitcoin Price Chart and Tables | Finance Reference
[7] “The Difference Between Gold and Bitcoin.” FXCM Markets, 3 Oct. 2019
[8] “The Difference Between Gold and Bitcoin.” FXCM Markets, 3 Oct. 2019
[9] “Where Is Bitcoin Actually Stored?” TenX
[10] Tepper, Taylor. “Are Bitcoin and Gold Good Investments?” Forbes, Forbes Magazine, 16 Dec. 2020
[11] Tepper, Taylor. “Are Bitcoin and Gold Good Investments?” Forbes, Forbes Magazine, 16 Dec. 2020