2020 has been a crazy year for the world. As the pandemic has intensified across the world causing lockdowns on a large scale, stock markets across the world except Europe have seen unprecedented gains. However, the economic outlook in the world’s largest economy is worsening. Coronavirus cases in the US are surging, retail sales are down, and unemployment claims have shot through the roof.
Investors expect a period of pain for 4-6 months before the vaccine is administered to a large number of the masses and the broader economy starts a robust recovery. In such times, it is normal for investors to look at alternative options as hedges for their investments.
Through the decades, the smart hedge move against market volatility has always been . However, this pandemic has seen the emergence of a new alternative: . The cryptocurrency, launched in 2009, has a lot of properties of a fiat currency but it also has a lot of qualities that qualify it to be a good hedge.
Why is Gold a Good Hedge?
Gold as an asset has very little connection to assets like stock markets, oil and currencies. It is seen as a safe haven asset. Gold demand is high but the supply is low. It isn’t easy to mine and it can’t be manufactured on a central bank’s whim. Gold prices have traditionally taken off during a recession as investors flock to it when stock markets crumble.
Why is Bitcoin a New Hedge?
Bitcoin shares a lot of qualities with gold. There is a finite supply of Bitcoin in the world: 21 million to be precise. Bitcoin is not owned by any central bank or country (just like gold) and it also has to be mined. New Bitcoin stipulations have ensured that rewards for mining Bitcoins have halved and this will mean that the final Bitcoin will be mined in 2140. The fact that Bitcoin has a finite supply is very comforting to investors. They expect the value of the cryptocurrency to surge further when supply runs out.
In 2016-17, Bitcoin prices were on a tear and one Bitcoin was valued at $19,783 in December 2017. The cryptocurrency went into a downward spiral after that and crashed to $3,300 by December 2018. The cryptocurrency has made a record comeback starting July 2020 where it was traded at $10,944 and within seven months it crossed $34,000. As of this article, it is trading at $32,945.
Bitcoin analysts say there is a marked difference between the 2017 rally and the current one. The 2017 one was primarily led by retail investors. 2020 has been different with big names in the institutional space investing into Bitcoin. According to Forbes:
“Nearly 20 institutions already filed paperwork with the U.S. Securities and Exchange Commission last quarter [April-June 2020], showing they invested in the Grayscale Bitcoin Trust (OTC:), a product of Barry Silbert’s New York-based Grayscale Investments, LLC. These include storied mutual funds like Ark Invest with $4.5 billion in AUM (assets under management) and Horizon Kinetic with $5.3 billion in AUM.”
Anthony Scaramucci’s firm SkyBridge Capital is the latest traditional fund manager to join the Bitcoin bandwagon and announced on Monday, January 4, 2021 that it had started the Skybridge Bitcoin Fund with $310 million in AUM invested from its $3 billion flagship fund.
Bitcoin vs Gold
- Security: Gold has existing standards and benchmarks around the world. The system for tracking and weighing gold is well defined. It is difficult to pass off fake gold as original. Bitcoin is safe as a cryptocurrency. It is decentralized and it is difficult, if not impossible, to access it thanks to multiple levels of algorithms. However, the same can’t be said about the storage for Bitcoin. Bitcoin history is replete with heists, especially Mt Gox. If gold is stolen, there is a chance one can recover it. However, Bitcoin is a totally different game.
- Scarcity: We know when Bitcoin supply worldwide will run out: 2140. We don’t know when all gold on earth will be mined. While both assets are finite in nature, Bitcoin wins out here as there is always the possibility of a new gold mine getting discovered.
- Access: Gold is accepted as an asset around the world. There are a lot of countries where Bitcoin is still illegal or there are banking bans (China, Canada etc). Bitcoin’s potential as a currency for people without access to traditional banks is still untapped. There is a major problem here. Generally people with no access to banks have no access to the digital world either.
- Volatile Nature: Gold is not volatile by nature. The trend with gold is that it generally moves up when the other markets are down. Bitcoin, however, right now is very volatile. It is not uncommon for Bitcoin to rise up 20% in a day and fall 15% the next.
As vaccines roll out, it is possible that gold prices might stabilize and remain flat for an extended period of time or might even fall slightly. Gold is trading at $1,954 right now. Bitcoin will move according to the whims and fancies of speculators. Because the supply of Bitcoin is limited and concentrated in the hands of a few large players, Bitcoin prices will see a lot of volatility.
Gold is a much more democratized asset. For instance, Indian women own between 23,000-25,000 tonnes of gold or 11% of the world’s total gold reserves. Gold prices will not see the levels of fluctuations that Bitcoin does.
For the time being, purely on the basis of fluctuation and volatility, gold is a safer hedge than Bitcoin.