Gold has long been a popular investment, particularly as a hedge against inflation in times of crisis. As the world economy reels from the impact of shutdowns caused by COVID-19, Bitcoin is attracting the eye of some investors seeking to add to their hedges.
Does Bitcoin have what it takes to replace gold as a safe haven? First, let’s take a look first at the difference between investing and trading.
Investing vs. Trading
Those seeking an inflation hedge expect the unprecedented “money-printing” by governments to lead to inflation. They expect a period of deflation to be followed by significant (or runaway) inflation.
These fund managers want to buy and hold assets that will maintain or increase in value as the purchasing power of the fiat currency of their country decreases.
Traders (or “day traders”) are not seeking to “buy and hold” but to predict short-term price movements. They may exit trades in seconds, minutes, or days.
Investors and traders react differently to volatility too. We can think of volatility as the weather preceding a hurricane. Investors seek shelter. Traders race out to surf the waves.
Gold Performance During the COVID-19 Pandemic
For centuries, gold has been considered a safe haven and stable investment — in the past 50 years, the price has risen nearly 4,000%. Relative scarcity has also driven the precious metal's growth.
At the beginning of the COVID-19 crisis, when uncertainty was at its highest, the spot price of gold was actually moving down in tandem with the stock market. This was likely due in part to investors and traders selling in order to cover losses elsewhere.
At times gold and bitcoin prices were moving together, leading some to speculate that Bitcoin was about to rival gold as a safe haven.
Despite market turbulence, gold is up 14% year-to-date. This quarter, as measured on May 19, 2020, gold gained 9.4%. (Source: Wall St. Journal tracking of the continuous front-month futures contract.)
According to Bloomberg, some top hedge fund leaders including Paul Singer, Crispin Odey, and David Einhorn, along with Blackrock Inc. and Newton Investment Management, are bullish on gold. They expect to see inflation in the wake of trillions in government emergency spending, and expect gold to play its traditional role as an inflation hedge.
Bitcoin Performance as of May 2020
In 2016, when the Brexit crisis began, talk about bitcoin as a safe haven investment increased. At that point, gold and Bitcoin were moving somewhat in unison. Still, many investors assumed the lockstep rise and fall would eventually end — and they were right.
Bloomberg price charts show that Bitcoin and gold “moved in opposite directions as the COVID-19 outbreak worsened.”
As of early May, however, Bitcoin was roaring back. It passed the $10k mark as it approached its “halving” and then retreated somewhat.
In the past, halving has resulted in unprecedented growth in the following months, which led some to speculate ongoing gains for Bitcoin investors.
But technical analysis currently shows slowing momentum and significant resistance at the $10k mark, meaning it will be difficult for the currency to push above that level in the near-term. This seems to support the view of the post-halving growth skeptics.
Betting on Bitcoin as an Inflation Hedge
Billionaire investor Paul Tudor Jones currently has 1%-2% of his assets in Bitcoin. This was revealed in a letter to investors that was first reported on by Bloomberg.
The legendary trader, who got his start in the 70s trading cotton futures, cited a coming “Great Monetary Inflation.” He suggested Bitcoin could play the same role that gold did in the 1970s (as a hedge against inflation). However, Jones did make clear that he regards his investment as a “great speculation.”
Bitcoin Futures (BTCM20) vs Gold
It’s important to realize that Jones is invested in Bitcoin futures (BTCM20) specifically. These futures are traded on the CME (Chicago Mercantile Exchange) which also offers options on Bitcoin futures.
- From the market meltdown around mid-March, the June BTCM20 contract soared to almost double in price, far outpacing gold’s performance over the same time period.
- Year-to-date it’s up over 30%.
- By contrast, gold futures (JUN 2020) are up 18% YTD, and up slightly over 13% from the mid-March market plunge.
How Is Other Crypto Responding?
When we talk about cryptocurrency, most people think of Bitcoin. (Indeed, Bitcoin serves as a type of "reserve Currency" against altcoins.) But many cryptocurrencies, including Ripple, Ethereum, and Litecoin, have a broad appeal with supporters due to their resistance to market pressures.
Cryptocurrencies plunged with the initial market meltdown in March, but they’ve since rebounded considerably, although most have not yet regained their February highs.
The plummet in prices as well as the rebound presented unique opportunities to day traders looking to trade on momentum.
Investors are looking for safe haven assets. Market winners year-to-date include orange juice (up 30.5%); 20+ year US Treasurys (up 20.4%), and gold (up 14%). The latter two are traditional inflation hedges.
Other precious metals declined in Q1 but rebounded in Q2. Platinum, hurt by initial mining lockdowns, is up this quarter (measured on May 19, 2020) by 19.4%. Silver, also sometimes considered a safe haven asset (although it also has many industrial applications) is up 23.9%.
Year-to-date, as of the time of this writing, Bitcoin is down -0.33%.
Gold has a long-term history as a safe haven asset. Bitcoin is relatively new on the scene. Both can be volatile but it is harder to detect what factors move Bitcoin prices.
That said, it’s a quiet ‘secret’ that bitcoin turned some early adopters into millionaires and many played the recent halving to their profit. While bitcoin price plunges can be spectacular, so can its ascents. Traders, of course, can choose to profit from declines or surges in price.
From its early days of 20-50 cents a coin to its current price at over $9.3k, bitcoin’s short and high-risk history has yielded spectacular returns.
Investors needing long-term stable performance in an inflation hedge are likely to continue to choose traditional assets like gold. Savvy day traders can find plenty of momentum in Bitcoin’s “roller-coaster” moves.
Those with deep pockets may consider Bitcoin futures or crypto index funds. Those with less to front, may want to learn about trading derivatives on gold or cryptocurrencies.