Metals versus Cryptocurrencies: Which is the Better Safe Haven?

Lincoln Murr

For the past six months, the economy has been in turmoil and investors are turning to safe haven assets in order to protect against economic uncertainty. In these times, should investors flock to Bitcoin and other cryptocurrencies, or precious metals like gold and silver?

 Ever since the onset of the global pandemic caused by COVID-19, many world economies have been in states of extreme instability. In the United States, the GDP has seen an annualized decrease of 33%, a number that some believe could signal the end of the annual 7% expected growth of the United States stock market. Nonetheless, the United States stock market has continued at an upward trend seen since it started its V-shaped recovery in April. Multiple indices, including the NASDAQ and S&P 500, have hit record highs, and Apple has become the first U.S. company to hit a $2 trillion market cap. When the economic future of the country is so uncertain, many investors and speculators are confused as to why the stock market is still growing. Some of these investors are hedging their bets by investing in safe haven assets. Some of the most common safe haven assets are precious metals, like gold and silver. Investors view these assets as a hedge against the stock market and the United States Dollar, as they typically rise during times of uncertainty. Especially now, when money printing by the Federal Reserve is common and trillions of dollars are being added on to the national debt at a rapid rate, investors are looking to ensure that their money will not be devalued.

One-year graph of the S&P 500. Note the V-shaped recovery after the pandemic

Though precious metals are seeing an increase in popularity during this time, there is another newer safe haven asset gaining a lot of attention recently: Bitcoin. Some investors view the cryptocurrency, which is completely detached from any government interference like inflation or regulation, as a means to hedge against the risks of the dollar becoming devalued. The characteristics that make bitcoin a safe haven are the same ones that investors see in precious metals, so the question that naturally arises is: Which asset is a better place to store money?

Let’s take a deep dive into both gold and Bitcoin to determine which makes the better investment to hedge against the devaluation of centrally-backed fiat currencies such as the United States Dollar.

History:

Gold is one of the oldest forms of currency and value known to man. In around 3,000 B.C., gold was incredibly important in Egyptian mythology, even being the material used for the capstones on the Pyramids of Giza. In 550 BC, the first gold coins were minted in modern-day Turkey. Initially, this system of using gold coins worked well, but logistical issues began to arise. There was no simple way to divide the gold pieces into smaller portions, and merchants and consumers had to trust one another about the legitimacy of their gold coins. To combat this problem, merchants with large amounts of gold and trust in a community said they would hold gold coins for people, and give them notes in exchange. These notes could be redeemable for a certain amount of gold, and these merchants became the first bankers.

This system was developed over the centuries but generally stayed the same until around the 19th century. At this time, many countries had currency redeemable for gold, but each country had a different price for gold. As global trade continued to develop, there became a need for a single price of gold, so countries came together and created the Gold Standard, a fixed rate for the precious metal to be traded at regardless of location. This system was effective until World War I and the following Great Depression. At this time, many people wanted to trade in their dollars for gold, as they were unsure that the dollar would survive. This rush of interest into gold and lack of faith in the dollar led the United States to create the US Gold Reserve Act in 1934, which prevented citizens from owning gold and required all gold to be converted to United States Dollars.

Great Depression run on the bank, where investors looked to withdraw their funds into gold or cash

After World War II, the global financial markets were in dire straits. As a result, the world leaders created the Bretton Woods Agreement, which pegged the price of gold to the United States Dollar, easily the world’s strongest currency at the time. Thus, one ounce of gold was worth $35 USD for the foreseeable future.

In the 1970s, the United States’ involvement in the Vietnam War caused the Bretton Woods agreement and the gold standard to topple. Increasing amounts of debt and budget problems caused then-President Richard Nixon to take America off the gold standard and end the Bretton Woods agreement. This was unexpected news and this event is known in history as the Nixon Shock.

Since the Nixon Shock, gold has been an asset not pegged to any value other than what investors determine it to be. Today, there is not a single country that uses the gold standard for their currency. Thus, holding gold is different from holding fiat currency. The price of gold historically has increased during times of uncertainty and economic downturn, and decreased or stayed stable during periods of prosperity. Though gold’s history as a safe haven asset is relatively short, its history as an item of value is almost as long as human history.

Bitcoin was created in 2008 by an anonymous creator who went by the pseudonym Satoshi Nakamoto. He outlined his idea for a decentralized peer-to-peer currency which was released on October 31, 2008. On January 3, 2009, the first Bitcoin block was mined and the network was officially created, and code in the note stated: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. This note hints at the fact that Bitcoin was created as a way to decrease reliance on central banks, who can use their limitless money supply to bail out banks who have been unreliable and greedy with their customers’ funds.

Bitcoin almost immediately started trading on exchanges where users could trade dollars for Bitcoin, and from the start was an asset to speculate on and to hedge against traditional fiat currencies.

Header for Bitcoin’s whitepaper

Since Bitcoin’s release, it has been increasingly adopted and used for transactions that are uncensorable and decentralized, and gradual developments are making Bitcoin closer to the peer-to-peer electronic cash system that Satoshi visioned.

Gold clearly has a longer and more proven history, which is important to consider when choosing where to place your money.

Use Case:

If someone tried to walk into a Walmart and buy something with a gold coin, they would be laughed out of the store. Even though gold was initially meant to be a medium of exchange, there is no feasible way to use it as a day-to-day currency in our modern economy. Instead, gold in an investor’s portfolio is used purely as a store of value. However, gold is also used in jewelry and electronics, though these sectors are not the main drivers of gold’s price. Those who want to speculate in gold can either hold it physically or on a brokerage account, like Charles Schwab or Fidelity. When selling physical gold, holders can go to a pawn shop or cash for gold store, which are both fairly common. Selling shares of digital gold held on exchanges is as easy as selling a stock, which can be done in a few clicks on an online brokerage account. Gold’s main use is purely to hedge against other assets, and it does not have the qualities of a currency.

Even though the adoption of Bitcoin is still in its infancy, it is well on its way to becoming a currency. By design, Bitcoin can be sent anywhere in the world where there is an internet connection. Ideally, the transaction will cost pennies and be sent nearly instantly, but in reality takes a couple of dollars and around an hour. Fortunately, developers of Bitcoin are looking into scaling solutions, which would cause Bitcoin to reach its lofty goals of instant and practically free transactions. For now, Bitcoin is not widely accepted in physical stores, but there are plenty of online stores that accept cryptocurrency, such as Overstock or Newegg. Furthermore, there are debit cards, such as those by BitPay and Crypto.com, which allow users to load their cards with Bitcoin and pay anywhere where Visa is accepted. One of the drawbacks of Bitcoin and its role as a currency is its lack of fungibility, the idea that each coin is equal to one another. In reality, coins that have been used in major hacks or on illicit websites have a history, and companies such as Coinbase have blacklisted these coins from their exchange in the past. Without fungibility, not all coins are equal, so coins with clean histories become more valuable than others. For everyday use, this is typically not a big deal, but something to note about Bitcoin.

 For those looking to cash out their Bitcoin today, there are many exchanges and even physical Bitcoin ATMs which will exchange USD for BTC. As Bitcoin continues to be adopted by large retailers, it will become more of a staple in finance, thus increasing its use and popularity among all people, which will of course cause an increase in price. Bitcoin offers users a lot more than a store of value proposition, as it is aiming to be the currency of the future.

Gold’s use case has been unchanging for hundreds of years, and it is doubtful that retailers will start accepting physical gold anytime soon. Though there is no use case as a medium of exchange for gold, its main use as a store of value is time-tested and true. On the other hand, Bitcoin has much more lofty use cases for itself and still has room to improve.

Public Sentiment:

 Gold is one of the most well-known investments available. From a young age, children are taught that gold is valuable, whether it be in the form of in-game currencies being modeled after gold or colloquial phrases such as “that’s gold,” meaning something is valuable and positive. With gold’s long and robust history, investors have no problem believing in the safety of the asset. Furthermore, being a physical asset, investors can rest assured that if they hold physical gold, it is as safe as they make it. Additionally, metals are basic by nature, so there is not much that could go wrong with metals, and the price of gold has never truly crashed. With these characteristics, the public sees no problems with the metal and generally has a positive sentiment about it.

Gold coin from the Mario series

 Bitcoin, on the other hand, is a lot more controversial. Even though it has increased in popularity since its initial release, it is far from a household name. According to a survey done by SurveyMonkey and the Global Blockchain Council, sixty percent of Americans have heard of Bitcoin and five percent hold it in their portfolio. These numbers were taken from only 5,000 people, so they must be considered with some skepticism. Even if sixty percent of Americans have heard about it, few know how it works or the technology behind Bitcoin. In total, there are about fifty million Bitcoin wallets, though this number cannot be used to gauge the total number of users, since they are free to make and many users abandon wallets after one transaction. News articles appear to focus solely on exchange hacks or price crashes, leading the public to believe that Bitcoin is highly speculative and dangerous. Other investors are confused by the digital nature of the coin and do not see how there is scarcity in something that is solely made up of 1s and 0s. This misinformed public does not know how Bitcoin works, and accordingly has a negative connotation of it. There is a reason that “explaining Bitcoin to your grandmother” is a popular article online, as the elderly also have a harder time understanding the cryptocurrency due to their general lack of technological savviness. In summary, few investors truly see Bitcoin as a solid and safe investment.

If only five percent of Americans hold Bitcoin, compared to countless times that number for gold, a safe assumption would be that gold is viewed more positively than Bitcoin. Until Bitcoin is better understood by the public, it would appear that things will stay this way.

Privacy:

 Investors anticipating the fall of the United States economy may not be keen on any government entity or group knowing about their holdings. Luckily for them, gold can be fairly private. An investor could easily go to a pawn shop and buy small amounts of gold using cash, and that purchase would be nearly untraceable. Larger amounts of gold sometimes require legal complications, so multiple smaller purchases cause less of a hassle. Unfortunately, this level of privacy is not available when buying gold online through shares of an ETF or other gold-backed security. This is because of the many stringent Know-Your-Customer (KYC) and Anti-Money Laundering (AML) procedures that every U.S-based client has to go through before buying securities online. Information required can include social security number and driver license ID, so this may not be the best option for a gold investor looking to hide their identity. Nonetheless, the physical way to buy gold can leave every paranoid investor assured that their gold purchase is secret.

Bitcoin has a unique system for privacy. On one hand, every single transaction is recorded on the public blockchain, and anyone can look at a certain address and determine its transaction history and current balance. On the other hand, these addresses are random strings of numbers, and a good amount of effort is required for an address to be traced back to a specific user. If an address is associated with a user, though, then anyone can determine how much Bitcoin a certain person has at any time, which gives full transparency and no privacy. If an individual uses a centralized exchange, such as Binance, Coinbase, or Bitfinex in order to convert their fiat to Bitcoin, then they can easily be traced. Signing up for one of these exchanges requires all the same KYC and AML procedures as buying gold, if not more. There are very few options to buy Bitcoin without these requirements, and they typically come with a significant price hike on the spot price of Bitcoin. Some of these options include peer-to-peer exchanges like LocalMonero and Bisq, or Bitcoin ATMs.

In the case that a person’s funds are traced to a specific wallet, they could simply move their funds to a new wallet and obfuscate the transaction using a coin laundering service, which moves Bitcoins quickly through multiple wallets in order to confuse people trying to track the coins. With the aforementioned methods, Bitcoins can be made nearly impossible to track.

Although both gold and Bitcoin are hard to trace, gold barely beats wins in terms of privacy. Being able to buy gold easily without KYC procedures is a considerable advantage over Bitcoin in terms of privacy. Maybe one day these measures will not need to be taken, but for now they are almost universally required in the cryptocurrency space.

Price Potential/Liquidity:

In these unprecedented times, predicting the future price of any asset, including gold, is extremely difficult. In April, Bank of America announced that its price target for gold over the next 18 months is $3,000, which would be a 50% increase from its current price. Their reasoning comes from the title of their report: “The Fed can’t print gold”. This would represent a significant increase in wealth, as the current market cap of gold sits around $12 trillion at today’s prices.  With such a large market cap, it is hard to see any massive upside for the metal, but who truly knows.

One prediction that can be made with confidence is that gold is not going anywhere anytime soon. The gold market is very liquid, with about 400,000 ounces being traded on the futures market daily for the past month. This means that any investor will not have a problem buying or selling gold and influencing the price. With this level of price liquidity and a huge market cap, any potential investor should easily be able to buy into gold and not have to worry about massive downside, but also not expect a 10x price rally.

Compared to other cryptocurrencies, Bitcoin dwarfs all of them with a cryptocurrency market dominance of 59.4% and a market cap of $216 billion. However, compared to traditional assets, Bitcoin still has plenty of room to grow. If the cryptocurrency were to grow to have the same market cap of gold, each coin would be worth over $600,000. This gives an investor who views Bitcoin as a digital gold a lot of upside potential. Unfortunately, this is far from guaranteed, and Bitcoin is known for its volatility and price crashes. Furthermore, no one knows if Bitcoin will be the digital gold of the future, and this valuation is purely speculative. The Bitcoin price has a massive upside but comes with significant downside risk as well.

In the cryptocurrency market, Bitcoin has had a monthly volume of $700 billion. This is enough for the ordinary investor to buy and sell without any risk of manipulating the price. Unfortunately, there are some holders of Bitcoin who have so much that they can easily manipulate the price, and this is a significant consideration when finding a safe asset to place one’s investments.

Conclusion:

Any investor looking to hedge against the central banks could benefit from having a little bit of both gold and bitcoin in their portfolio, but the exact amounts depend on the risk tolerance of the investor. For those looking to outperform the stock market and take on more risk, Bitcoin appears to be the better investment. For the investors wanting to store their money in a time-tested and stable asset that rises with inflation and against the stock market, gold is the way to go.

A good portfolio should hold multiple asset classes in order to hedge against one asset class crashing. Both Bitcoin and gold offer different upsides and downsides, each suited to a specific type of investor. The purpose of safe haven assets is to provide diversification, so why not add a little bit of both to the portfolio?