Why Bitcoin Will Never Replace Gold

News, Opinion | July 31, 2020 By:

Bitcoin is often positioned as a successor to gold, but its performance during the recent economic struggle has left a lot to be desired. Meanwhile, gold continues to play its role as a safe haven exceptionally well. As the precious metal innovates through tokenization and the risk of stagflation looms—gold’s narrative as a store of value will see it shine like never before.

Gold flourishes amid inflation. You only need to look back as far as the 1970s to see just how valuable it is to own gold throughout financial strife. Add in sluggish economic growth, and you have yourself a breeding ground for gold’s upside.

The dastardly, dynamic duo of inflation and stagnant growth is aptly known as “stagflation”, and we’re at risk of facing such an environment soon enough. But while it poses a threat to the purchasing power on goods and services, it’ll be a boon for assets like gold.

Right now, in the US alone, the government and the federal reserve are churning out stimulus like never before. In the US, this stimulus represents approximately 12% of GDP, and catalyzed national debt is up to unprecedented levels—a towering figure that is sitting around $26.5 trillion and mounting. In Japan, things are even worse, with their stimulus package likened to 21% of GDP.

In June, the fed chair Jerome Powell hinted that the economy could remain stagnant for some time, pledging to keep interest rates near zero until at least 2022. To make matters worse, the Fed announced that it would continue to increase the balance sheet at a rate of $80 billion worth of treasuries and $40 billion in mortgage-backed securities per month.

We are also witnessing increasing social divides, with the wealth gap continuing to widen due to numerous asset bubbles created over the last 30-40 years, and now accelerating dramatically on the back of the unprecedented monetary response to COVID-19. The social unrest particularly evident in the US, has the risk of creating further instability in global currency markets in particular, i.e. USD weakness, when coupled with the political and monetary instability that we have witnessed in the last 6-12 months. 

A move towards de-dollarization has been an objective of numerous alternative superpowers in recent decades, predominantly to restrict the ability of the US to control international matters. Considering the majority of international trade is executed via USD, the US has, for a long time, been able to control international matters via sanctions effectively due to the economic impact of exclusion for the dollar market. As we continue to witness social, political and monetary instability, there is an increasing risk of a large sell-off in USD. A movement away from USD as the reserve currency would create significant uncertainty in financial markets and would lead to large allocations to stores of value, i.e. gold, and to some extent BTC. This would be paired at a time when gold would also be rallying in on the back of sustained USD weakness.

Gold Proves Its Worth, While Bitcoin Watches On

Amid economic chaos, Bitcoin is experiencing stagnant growth of its own. Far from proving its narrative as a hedge against macro risk, the asset appears directionless. At present, Bitcoin is down 12% from its YTD (year-to-date) highs established in February.

A recent report from the crypto exchange Kraken notes that Bitcoin’s correlation with gold is slipping as it strengthens its relationship with the S&P 500, thereby potentially exposing itself to the same systematic risk it claims to hedge against. The report also highlighted a six-month low of Bitcoin’s annualized volatility—going some way to explain its sluggish performance.

Gold, meanwhile, has performed as expected, appending 20% to its price point YTD and attaining a 7-year high.

And it’s no surprise. Gold has a long history as a store of value among political and economic uncertainty. In the 1970s, when inflation was at an all-time high in the States, the precious metal rallied by around 950%—cementing itself as a hedge against both inflation and the unconventional monetary policy that so often precedes it.

That’s just one of the reasons why gold isn’t going away any time soon; another is due to innovation within the precious metals market.

Modernizing Gold

Right now, we’re witnessing the evolution of technological gold-buying solutions, and it’s driving a brand new wave of investors to enter the market. Coupled with advice from private banks to stock up on gold, the race to take excessive risk off the table has observed soaring demand for the yellow metal. In turn, gold-buying apps such as Glint Pay saw upwards of a 700% increase in client interest between February and March this year. Building on this global demand, challenger bank Revolut entered the fray in March, offering its 7 million+ users exposure to the gold market. GoldPass, the Perth Mint’s digital gold investment app has also seen a 40% increase in users over the past few months, and an 80% boost in gold holding. 

This isn’t the only way in which the precious metals market is innovating.

Bitcoin is often equated to gold. They’re both scarce assets with finite supplies, and they’re likewise both mined—albeit in very different ways. But that’s where the similarities end. With its speed, low-cost transferability, and divisibility, Bitcoin is frequently dubbed gold 2.0, or digital gold. Via tokenization, however, physical gold can now boast those attributes as well, creating actual digital gold.

Tokenization takes physical gold and tethers it to a digital token. This gold-backed token is represented on an immutable ledger, such as the blockchain. In digitizing gold, you immediately eliminate its obtrusive pain points such as storage, management, and value transfer. Tokenized gold is typically backed by physical bullion stored in vaults, allowing the holder all the same benefits and more.

Gold’s innovative drive and the looming threat of stagflation will likely see it in vogue for the next 2-3 years, at the very least. As such, we shouldn’t be surprised if we see gold trading $2500-$3000 per/oz over the medium term.

So long as gold is tokenizable, Bitcoin can’t supersede it. And as long as there’s risk, gold will always be there as a hedge against it.