In times of trouble, people often run towards gold. It’s solid, portable, and always has value.
When the world is collapsing, gold is something you can put in a bag and carry with you, safe in the knowledge that wherever you end up, that gold will always have a buyer and a reasonably predictable price.
The same isn’t true of paper money. Anyone trying to flee Venezuela in September 2018 with their savings in bolivars, for example, would have found that their money had lost 90 percent of its value by the end of the year. If they had changed their cash into gold before they left, they would have earned a profit of about $146 per ounce in that time.
Bitcoin should have a similar use. Like gold, it’s not directly connected to financial systems. Neither gold nor bitcoin are national currencies. Their prices can’t be manipulated by reserve banks or brought down by poor economic policy. Politics and crises might affect the price of gold but the movement comes from the actions of buyers and sellers, not from government control.
Governments can’t manipulate Bitcoin either. Because the blockchain code has already determined the rate at which the coins are produced, governments can’t just produce more of them in the same way that they can print more fiat currency.
Both assets should be safe places to put value when you need a haven.
In practice though, it hasn’t quite worked out that way. Both Bitcoins and gold might be mined but they’re very different assets.
Start with the obvious: gold is physical. You can touch it, see it, and if you have to, you can carry it. Bitcoin is virtual. It relies on the continued use of servers for its existence. If there’s no electricity, there are no cryptocurrencies. Although it’s unlikely to happen, Bitcoin wouldn’t survive the most extreme of crises.
Bitcoin is also new while gold has proved its long term value for more than 6,000 years.
The earliest use of gold in jewelry dates to about 4,400 BC—and that use remains. Even today, about half the demand for gold comes from the jewelry industry. While some digital tokens might be designed to represent assets such as the movement of goods in a shared economy, their value depends on the continued use of that specific service. A digital token used by a single rental scooter company is only valuable if that company is in business. Cryptocurrencies don’t yet work as currencies, and like shares, crypto tokens are only as valuable as individual companies. Gold will have value as long as there’s a jewelry industry.
But the most important difference between Bitcoin and gold as a safe haven is volatility. Before the coronavirus crisis, Bitcoin’s 30-day volatility had ranged between 2.2 percent and 3.5 percent. That’s a big improvement on the 7.4 percent it reached at the end of 2018 but it’s much higher than the roughly 0.2 percent volatility of gold over the same period. Even at the height of the crisis, gold’s volatility remained under 1 percent. Bitcoin’s volatility was nudging 11 percent.
In 2016, before Bitcoin took off and long before the coronavirus, Coindesk looked for a correlation between the movement of gold and the movement of the digital currency. It found almost none. It would find none today too. Between January 1 and April 2020, the price of gold rose by about 7 percent. The value of Bitcoin has fallen by about 5.5 percent over the same period.
Bitcoin and gold do have one important characteristic in common: it’s not clear what moves the price of either. But Bitcoin, although easier to put in a bag and carry away, still appears to be too volatile to function as a safe-haven asset.
Joel Comm is New York Times best-selling author, blockchain enthusiast, futurist speaker, social media marketing strategist, live video expert, technologist, brand influencer, and eternal 12-year old. His latest project is as co-host of The Bad Crypto Podcast, a top cryptocurrency show making the future of digital payments easy to understand.
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