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Will Bitcoin Replace Gold as a Modern-Day Safe Haven?

By Avtar Sandu, Senior Commodities Manager, Phillip Futures
Bitcoin supporters tout the cryptocurrency as the “gold of the digital era” – a safe-haven asset for individuals to park their money in the tumultuous financial world. Avtar Sandu looks at the concept behind safe haven assets and explains why gold investment remains an essential risk diversifier.

The meteoric rise of cryptocurrencies in 2017 was breathtaking for the financial industry as bitcoin’s market capitalisation reached $320 billion at its peak. Financial institutions lamented their lack of active involvement and scrambled for a piece of the pie in the later part of 2017.

Global financial exchanges responded by establishing partnerships with crypto exchanges to create financial derivatives, while fund houses roared on the back of news of plans to launch cryptocurrency exchange-traded funds in 2018.

However, market opinion and the stance taken by regulators worldwide have been deeply divided on the subject of digital currencies. Global financial leaders have derided bitcoin as a massive speculative bubble. Crypto bulls, however, have stood firm at the other end of the spectrum and have branded the digital currency as a contemporary safe haven asset for generations to come.

Examining the concept behind safe-haven assets

As we seek to appraise cryptocurrencies on their claim to be a safe-haven asset, they must be examined against gold, the current incumbent. The gold standard has stood tall historically and has since transited into becoming effectively a safe haven asset that delivers positive returns in times of political turmoil and financial market instability. Its ability to provide capital growth, value preservation and risk management embrace the fundamental tenets of a safe haven asset.

Bitcoin proponents use the term “digital gold” to describe cryptocurrencies because of several key similarities they share with the precious metal. Both assets are globally traded, limited in supply and have been endorsed by market players as alternatives to fiat currency.

With bitcoin’s explosive growth in prices in 2017, a financial hot potato weighs in for investors looking to take part in the digital currency rally: does bitcoin qualify as a safe haven asset?

In terms of market performance, bitcoin has passed with flying colours in 2017. It has repeatedly reached all-time highs since its inception and has made an annual return of 150% over a five-year average, thus outperforming gold. Prices have, however, retraced more than 60% from the highs. Second, bitcoin has fulfilled a secondary criterion, which is the adoption of the digital asset in times of market uncertainty. An actual example is the European debt crisis and Brexit, occasions during which bitcoin prices surged. It supplements assessments on market psychology for bitcoin as a temporary safe haven. Third, bitcoin has been frequently touted as an alternative store of value in countries that are experiencing economic instability.

Asset class dangers

Despite positive statements supplementing bitcoin’s positioning as an effective safe haven asset, its disadvantages have been raised by industry players too. Bitcoin is highly volatile and prices have been shown to fluctuate by up to 20% in one day. Its price volatility has made it undesirable for the majority of investors.

Cryptocurrencies are illiquid compared to gold, as large portfolio shifts have proven to be cumbersome and difficult. Cryptocurrencies are highly susceptible to government intervention and thus affects the market’s acceptance of it as a “true” financial asset class. Crypto-bears have stressed on a possible meltdown, where their monetary value might recede to zero. Lastly, cryptocurrencies are inherently reliant on the internet and technology. Cybersecurity issues have plagued cryptocurrencies, with a recent hacking incident wiping off $500 million in market value. Thus with systemic risks still afflicting cryptocurrencies, the majority of investors are likely to remain unconvinced regarding the prospects of bitcoin as a safe haven asset.

Will gold forge ahead and stand tall?

We assess that the time-tested financial narrative on the precious metal will continue for the foreseeable future. This is largely due to the fundamental principles below:

  • Effective store of value
    The argument for an effective store of value is based primarily on the level of trust it has in society. Bitcoin has struggled with convincing the public about the merits of its wider adoption as key decision makers are uncertain of the long-term prospects of a volatile medium of exchange. Gold, however, has historically demonstrated its abilities for capital preservation and growth. It is frequently utilized in wealth management portfolios and as a risk management vehicle.
  • Market liquidity
    The gold market is extremely liquid with $150 billion to $220 billion being traded daily in over the counter (OTC) markets and global exchanges. Cryptocurrency exchanges are plagued by poor management, cybersecurity issues and slow response times, particularly during market turmoil. Bitcoin’s liquidity pales in comparison with the precious metal.
  • Proven reputation as a safe haven asset
    The precious metal has stood tall amidst stock pullbacks, geopolitical uncertainties, and inflationary and deflationary pressures to the economy. Investors have traditionally sought shelter in gold due to its proven reputation as a safe haven asset. Thus, the precious metal’s position within the trust-based system will continue to underpin demand levels for gold.
How can the modern investor capitalise on gold’s stability?

Investments in the precious metal can be made through various methods. Gold can be traded physically, through OTC markets and on regulated global exchanges with a range of financial derivatives. This gives the modern investor a myriad of choices for their portfolios that can cater to individual preferences or investment appetites.

Most reputable brokers, including Phillip Futures, offer a range of investments in gold, including bullion dealing, spot gold trading, futures contracts and option derivatives. For bitcoin bulls, Phillip Futures also offers bitcoin futures for investors to hedge their risk or take part in derivatives trading. Investors can seek one-to-one appointments with our advisors on financial matters and the viability of gold investments for their portfolio.

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