In addition to traditional fiat currencies, if there’s one asset Bitcoin is often compared with, it’s gold. In fact, the largest cryptocurrency is often referred to as ‘digital gold’.
Bitcoin advocates argue that the notorious cryptocurrency can be a good safe-haven investment. However, the product has tended to trade closer to equity markets in recent times and has been plagued by massive volatility, which has either made investors fortunes or crushed them.
Some market observers see similarities between Bitcoin’s recent bull market and the gold rush of yesteryear.
“The recent enthusiasm for Bitcoin is reminiscent of the Gold Rush in the western U.S. from 1848-1860,” notes S&P Dow Jones Indices. “With fits and starts, U.S. enthusiasm for gold exploded over this time period. Gold was the most popular safe haven and store of value in the 19th century. Viewed as one of the least volatile commodities, gold prices during that time were surprisingly tepid in comparison to the current, highly volatile moves from Bitcoin. Less liquid than other established stores of value, Bitcoin’s recent move has been parabolic in nature.”
Inside the Bitcoin-Gold Comparison
In the eyes of some market observers, bitcoin is still searching for its place in the asset allocation spectrum, but many backers of the digital currency typically compare it to gold, a comparison gold bugs are often loathed to acknowledge.
Gold bugs often say Bitcoin is too volatile to be considered a legitimate safe-haven investment and that cryptocurrencies have a weak case as stores of value. Indeed, long-term data show loose correlations between Bitcoin and bullion. However, the coronavirus outbreak has forced some tightening in the gold/Bitcoin relationship.
“Recently, the parallels between the two assets have grown,” according to S&P. “Both Bitcoin and gold are viewed as scarce, have the potential to be held outside of conventional financial markets, and have values that cannot be inflated away by relentless money creation and currency debasement. Market participants, including mainstream asset managers, appear to be looking to both as attractive inflation hedges.”
The big difference between gold and Bitcoin is supply dynamics.
“In addition to performance, the fundamentals of Bitcoin and gold differentiate in owning one versus the other. Gold is a physical asset, while Bitcoin is a digital one. While both are scarce, gold does not yet have a ceiling to supply, while there ultimately can only be 21 million Bitcoins mined,” concludes S&P.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.