Gold vs Bitcoin: pandemic-driven stimulus fuels growing rivalry

Bitcoin has gained ground to rival gold as a store-of-value investment because, like gold, it is a hedge against currency devaluation(opens in a new tab) and volatility, cryptocurrency market sources say.

Gold pundits frown at the claims. The World Gold Council, which aims to stimulate and sustain demand for the yellow metal, argues gold, a "high-quality liquid asset," is more practical, with more diverse supply sources and whose ownership is less concentrated. After all, it's been a means of exchange for over 2,000 years.

Gold may complement the newcomer in a scenario of widespread asset price inflation. "Bitcoin fails to replace gold's role in a portfolio… adding Bitcoin to a portfolio may warrant a higher allocation to gold, likely as a way of managing the additional volatility," WGC argues.

But the rivalry is clearly present. And a tipping point may come if Central Banks start looking seriously at Bitcoin as an extension of their already recognized interest in developing digital versions of national currencies.

"Gold's biggest hurdle in the short term is Bitcoin," said Jon Deane, CEO of Trovio, an Australia-based digital commodities tradehouse, in an interview.

"It's seen as an alternative to gold, an emerging asset class or commodity: a lot of gold demand fell out of the jewelry and Central Bank markets in 2020(opens in a new tab), though this could come back this year."

"Gold has lost ground to Bitcoin as investor funds have flowed towards the cryptocurrency on momentum trade," said John Meyer of metals broker SP Angel.

"Bitcoin provides further diversification. While we do not see gold losing its appeal as an anti-inflation hedge, it is having to share new fund flows with Bitcoin and may pull back on days when momentum attracts more funds."

Dollar decline

Dollar weakness—expected by most analysts to continue for the medium term—is one key to Bitcoin's success.

"A weaker dollar is naturally bullish commodities," Deane said.

COVID-19 has brought an "enormous wave of currency debasement" and the recovery scenario will see Bitcoin surge as legacy systems crumble, claims Juan Pablo Thieriot, CEO of Uphold, a leading digital broker.

"We have lost a year of economic activity but the bull market has raged on due to stimulus. COVID has caused more printing of money in an abbreviated period than at any time during the last 200 years."

"That's what's driving Bitcoin's run: it should also drive gold and other non-dollar derivative assets."

Mainstream acceptance

Bitcoin investment is becoming more mainstream. "It's no longer a speculative retail bubble," Thieriot said in an interview. "Corporate treasuries, including at Tesla and Microstrategy, as well as a wave of money managers, are now choosing Bitcoin both as a hedge against currency debasement, and out of competitive necessity."

Bitcoin's similarities with gold may explain some of its success, as well as its significant value gain in recent years.

Nicknamed "digital gold", Bitcoin looks set to retain an innate value because its 21 million units are a finite supply. Gold's market supply, while not finite, can be considered limited, even scarce.

Rising values

Gold's rise has been inexorable over the past 50 years, accompanying inflation and reflecting higher production costs as mines get deeper.

From a London Bullion Market Association-recorded monthly average of $35.18/oz in January 1968, it touched a record $2,067/oz at one point in August 2020. Investors sought its safe haven qualities as economies shrank during the COVID-19 pandemic and the US dollar weakened, money supply grew and debt ballooned.

Gold stood at $1,744/oz April 14, down 0.21% on the day. SP Angel, a leading price forecaster, sees it likely to test $2,000/oz again over the next 18 months "on new growth and commodity price pressure."

Producer Serabi Gold also anticipates the gold price will rebase itself above $2,000/oz over the next few years. In an email to S&P Global Platts, CEO Mike Hodgson attributed this to robust fundamentals, again pointing to currency devaluation linked to the huge stimulus packages being provided by governments.

Bitcoin's rise has been nothing short of explosive. From a unit worth $0.08 at its launch in 2008 as a currency alternative to counter impacts of the global financial crisis, it recently hit as high as $60,000 per unit, bolstered by a $1.5 billion investment by Elon Musk's Tesla – before recoiling slightly.

Total supply is valued around $700 billion, from $200 billion a few years ago: a chunk of the total cryptocurrency universe of some $1.75 trillion. "It's getting close to a relevant level and becoming appealing to investors from an institutional standpoint," according to Deane.

Analysts believe its value may near-double this year to at least $80,000 per unit, while gold is widely expected to return to over $2,000/oz. Volatility may ring alarm bells—according to a February WGC report, Bitcoin has been four and half times more volatile than gold over the past two years.

"Bitcoin trades like a ‘high-octane' tactical asset," the WGC said.

Bitcoin's registry on a public blockchain makes transactions immutable and secure. It can't be hacked because of its decentralized nature. Unlike gold, there are no smuggling or conflict-mineral concerns in Bitcoin, even though its origins may have lacked transparency.

"Bitcoin's reputation is improving, it is fully transferable, borderless and you can take it anywhere with you and use it to pay for things on platforms including Amazon," Deane said.

But in terms of environmental credentials, Bitcoin may actually compare unfavorably to gold. Bitcoin mining requires heavy computational power which makes it highly energy-intensive. It has "a nastier carbon footprint than gold and is possibly the dirtiest financial instrument ever created", Thieriot admits.

A March 17 Bank of America research report labelled carbon emissions from Bitcoin mining as a "dirty secret", linking Bitcoin to Chinese coal due to Chinese-driven investor power. "Its environmental score is poor: the network emits today about 60mn tons of CO2, the same as Greece," BoA analysts say.

Who's investing?

With the advent of corporate investors such as Musk, the Bitcoin market is no longer the realm of the technologists and millennials that favored it ten years ago.

"We've gone from retail traders to institutional investors including major pension funds and hedge funds seeing Bitcoin as a major investment space over the past two to three years," Deane said, counting Standard Chartered and Goldman Sachs among investors.

Central Banks, which have in the past set great store by gold, are not known so far to have invested in this digital alternative, though Theiriot considers this "inevitable" in future. Trovio's Dean points to a place for Bitcoin as a reserve currency, albeit more likely in emerging than developed economies.

For Serabi Gold's Hodgson, these developments do not pose a serious threat to the precious metal: "Bitcoin does create an alternative to gold for investors to hedge exposure to fiat currencies but we don't see it denting gold's appeal," he said.

"There is also the risk that it will be impacted by new legislation that could dramatically reduce [Bitcoin's] investment appeal."

So is the rush towards Bitcoin sustainable? According to BoA the main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply. This keeps it exceptionally volatile and susceptible to changes in the dollar value. In short, much like gold...