Cryptocurrencies: Bitcoin versus gold as a safe-haven asset

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 16, 2020 - March 22, 2020.
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The turbulence in global financial markets – driven in part by fears over the Covid-19 outbreak and geopolitical tensions — has seen many investors seek refuge in bitcoin and gold. This has revived the debate of whether the cryptocurrency can and should replace the yellow metal as a safe-haven asset in portfolios. 

The price of bitcoin, referred to by many as “digital gold”, surpassed the US$10,000 mark on Feb 12, a feat not achieved since September last year. By comparison, gold saw a surge at around the same time, when gold futures contracts breached the US$1,600 mark on Feb 18. The last time these reached this level was seven years ago, in March 2013. The precious metal briefly crossed US$1,700 per oz on March 9 before retreating to the US$1,650 level. 

Bitcoin has been compared with gold as the two assets bear some similarities, particularly how they can be obtained through mining and their limited availability. Only 21 million bitcoins can be mined and about 87% of them are already in circulation. Given the similarities, some market observers expect the cryptocurrency to behave the way gold does — retaining or increasing in value during times of market turbulence. 

This narrative has grown stronger over the past few months in response to the increasingly volatile market environment following geopolitical concerns and the Covid-19 outbreak, says Matthew Dibb, co-founder of Stack, a provider of bitcoin trackers and cryptocurrency index funds. “The trade tensions, political turmoil and virus outbreak are some of the events that have led investors to look at uncorrelated assets, such as bitcoin, to hedge their portfolios. 

“We saw a significant inflow into bitcoin, particularly at the end of last year and the start of this year. This has been further heightened by the anticipation of the bitcoin halving, which will take place in May.”

Once every four years, the issuance rate of the entire bitcoin network is reduced by 50%, which reduces the number of new bitcoins entering circulation every day and increases mining costs to secure the network. Historically, this event can be seen as one of the driving factors behind bitcoin’s previous bull runs, says Dibb. Next year, bitcoin’s block reward will be halved from 12.5 BTC to 6.25 BTC per block.

The bitcoin versus gold as a safe haven argument continues to be debated. Many market analysts and players say bitcoin is still a volatile asset class and should not be used as a substitute for gold in portfolios. AxiTrader Asia-Pacific market strategist Stephen Innes does not think the cryptocurrency can be classified as a safe haven as it is not backed by central banks. While he acknowledges that investors are increasingly buying the digital asset for safe-haven purposes, he does not believe it has the ability to match gold’s role in a portfolio. 

“I will not categorise bitcoin as a safe-haven asset. In fact, I would not even put silver in that category. It just does not have the same backing power. I would be more comfortable if central banks were using it as a reserve currency, but the problem is they are not and I do not think it will ever be,” says Innes.

Jeffrey Halley, Oanda senior market analyst for Asia-Pacific, concurs. He points out that bitcoin’s volatility is far too high for it to be a realistic safe-haven asset, on top of the fact that it is associated with great security risks. 

“Bitcoin prices fluctuated heavily last year, even up to US$13,000 at one point. Now, it is at about US$9,000 (as at Feb 27). There should be alarm bells ringing if a safe-haven asset were to move the way bitcoin does. Safe-haven assets typically do not shoot up 300% over the course of six months. When pundits are saying that, they are choosing the data points they want to use. Cryptocurrencies do not pay interest and once you lose your key, you have lost your money forever. I do not know if it is as secure as everyone makes it out to be,” says Halley. 

The digital currency has been heavily fluctuating this year as well. After steadily declining in value since Feb 15, bitcoin saw its biggest overnight drop on March 8, when its fell more than 10%, according to CoinGecko data. The value of the entire cryptocurrency market fell more than US$28 billion to US$227 billion as a result and had yet to rebound as at press time.

At the other end of the spectrum, Kelvyn Chuah, co-founder of digital asset exchange platform Sinegy Marketplace, believes that bitcoin can be an asset that people seek refuge in. However, it is not a suitable asset for everyone, especially those who are unfamiliar with the cryptocurrency and the technology powering it. 

“Gold is more stable than bitcoin, hence most investors will choose it over the cryptocurrency. However, higher risk typically means higher returns. Bitcoin is up 100% year on year and 20% for the year to Feb 28, outperforming gold. It is up to investors which asset class they are more comfortable with. Some senior investors who are unfamiliar with the asset class tend to not know how to secure their accounts. This puts them at risk of losing their cryptocurrencies. So, they should just buy gold to hedge their portfolios,” says Chuah. 

“Millennials who are more tech-savvy, on the other hand, would believe more in decentralised assets. Hence, they would choose to invest in something like bitcoin. This growing sentiment is not something we can ignore and over time, it will be more common for people to have bitcoin as part of their portfolio, together with other assets, including gold.”

Outlook for 2020

At the time of writing, gold prices were hovering at about US$1,650 per oz, up about 9% from the start of the year. Its performance is being driven predominantly by fears surrounding the Covid-19 outbreak, an unprecedented factor that took place early this year, says Innes. Prior to this, investors were concerned about slowing global growth and an escalation in geopolitical tensions, both of which are still on the table, he adds. 

“From a sheer buying perspective, the central banks are offsetting the waning physical demand out of Asia. At the moment, Asia’s retail is not buying physical gold due to weaker currencies — it is getting just too expensive for them. January is typically a very strong buying season in China. But this year, most people were cooped up in their homes and not making any gold purchases,” says Innes.

On his outlook for 2020, he says his conservative year-end target for gold is between US$1,500 and US$1,690 per oz. His actual target is much higher at US$1,750. “I think the knock-on effects of the virus are underpriced. I am deeply concerned about Japan. It is a big chunk of Asia’s demand. If Japan goes into a recession due to the virus repercussions, it will hurt the global economy. That is why I am nudging up my year-end estimate.” 

Halley also thinks gold’s performance will depend on the developments of Covid-19. The yellow metal should continue to outperform if the virus outbreak leads central banks to introduce measures to support growth, he says. “To be honest, I am habitually bearish on gold, but I am happy to be proven wrong. There is no reason gold cannot move towards the US$1,800 level or higher as the virus takes hold of the global economy. I am not ruling out that it will spike towards US$2,000.”

On March 3, bitcoin was trading at US$8,824 apiece, a 22% increase year to date. 

Chuah expects a “slow bull” leading up to the halving of bitcoin. “However, investors should be wary that cryptocurrency assets are not immune to the global equity selloff. A few weeks ago, the entire market capitalisation of the cryptocurrency was US$280 billion. Today, it is less than US$250 billion,” he says.

Stack co-founder Michael Collett says the firm anticipates bitcoin being traded higher, between US$15,000 and US$22,000 per coin, post-halving. The cryptocurrency’s current all-time high is almost US$20,000. “This is quite a conservative target. There are market players who are targeting US$50,000 per bitcoin. From our perspective, the halving and the situation in global markets are pointing towards bitcoin’s outperformance this year,” he adds.