A battle is raging across the internet between enthusiasts of two different assets: Goldbugs, who believe the yellow metal is the best possible store of value, and a new generation of bitcoiners that believe in a ‘digital gold’.
On one side, gold advocates like Peter Schiff see the metal as the ultimate safe haven — retaining value for millennia, even as civilizations rise and fall. And on the other, a growing number of bitcoin fans are suggesting that fragments of digital code on the blockchain are a far superior store of value.
As the global economy teeters over the perceived threat of Brexit, recession in Europe and potential downturn in China, investors are flocking to both of these safe havens. In 2018, central banks purchased the most gold in nearly 50 years. And, demand is also growing for bitcoin, which is becoming increasingly correlated to macro economic moves; Institutional platforms like Grayscale and CME are all reporting record inflows.
But which of these assets will be the safest port in the coming storm?
To find out, I’ve compared bitcoin and gold against some of the characteristics of Morningstar’s Safe Haven Asset Framework.
Let the battle begin!
The first characteristic of a safe haven asset is liquidity — how easy it is to buy and sell the asset without affecting the price.
Gold is prized for its liquidity, and can be quickly converted into cash at gold dealers, exchanges, and even high street shops.
The most liquid form of gold is small coins in standard denominations, but even large amounts of gold can be traded with ease.
The only downside is that because of the storage and transport costs associated with gold, brokers tend to sell the metal at a higher price than they will buy it, meaning the liquidity comes at a cost.
Funnily enough, bitcoin — or at least blockchain — is helping gold to become even more liquid.
Tokenized gold projects like VGold, a lightning-based bullion token, will make the metal easier to trade for other onchain crypto assets like bitcoin, stablecoins, or any other tokenized asset.
Liquidity is still a problem for bitcoin.
Although there are several very liquid exchanges, and lots of ways to trade through peer-to-peer services, the amount of bitcoin moving around each day is still very small.
In recent months, around 40,000 BTC ($300 million) have changed hands each day. This is a tiny fraction of the very liquid forex market which has an average turnover of more than $5 trillion daily as of April 2016
One of the side effects of this low liquidity is high volatility. When traders with deep pockets are trying to process a big sell order on an exchange, orders will quickly get filled and the price will start to move, triggering stop losses and sending price plummeting.
Currently, the total value of gold in the world is worth approximately $7 trillion, while the current supply of Bitcoin is worth only around $100 billion—just 1.5 percent.
If the decade-old digital currency was able to catch up with the timeless metal and reach gold’s market cap of 7 trillion, then each bitcoin would be worth around $333,333, given a total Coin Supply of 21 million.
With more dollars locked up in bitcoin, the market is likely to be more liquid.
2. Functional purpose
The second characteristic of a safe haven asset is a functional purpose beyond acting as an arbitrary store of value. These uses “create an anchor of demand for the asset”.
There is a reason why gold has played such a pivotal role in civilization, and not other metals like steel, aluminium, or zinc.
Gold has unique chemical properties that make it useful in industries like electronics, dentistry, engineering, medicine and jewelry.
It doesn’t react with the skin, it is malleable, noncorrosive, pleasing to the eye, easy to work with, and can be manipulated into all sorts of shapes. As such, almost 20% of gold mined each year is used in the electronics industry.
Although these chemical properties also happen to make gold a fantastic form of money, even if it suddenly wasn’t considered a store of value, it could still be used for other purposes.
Unlike gold, bitcoin is only useful as a store of value to make transactions with.
The unique value proposition is that transactions happen without a third party, and are impossible to tamper with.
Unfortunately, without any other use cases, bitcoin still loses out to gold in terms of other use cases.
The third characteristic of a safe haven asset is scarcity — it needs to have a limited supply that isn’t outpaced by demand.
There is only a very limited amount of gold embedded in the earth’s crust – It is hard to find, available in only very low concentrations, and must be extracted using a complex mining process.
This scarcity ensures the supply of gold is only very gradually increasing, making the price of the asset mostly dependent on demand.
Just like gold, bitcoin has a predictable supply, making the price mostly dependent on demand.New bitcoins are mined and released on to the network through a pre-programmed, transparent process. This will keep running until the hard cap is eventually reached at 21 million when the last bitcoin is mined in 2140.
The fourth characteristic of a safe haven is permanence — how well the asset can be expected to preserve its value over the long-term.
Gold has been interwoven with human civilization for thousands of years, and has remained valuable for all of that time.
But as we move into the future, there could be an event on the distant horizon that threatens gold’s value.
NASA claims to have identified an asteroid — 16 Psyche — that is the size of the Tower of London and worth up to $5.7 trillion — enough to make everyone on Earth a billionaire.
As Space travel grows cheaper, asteroid mining companies are getting ready for a space gold rush, which would potentially devalue the price of gold on earth.
Bitcoin’s 21 million hard cap is a key feature of the cryptocurrency, but some foresee a day when this limit could be changed.
Though it is unlikely, such an event could reduce demand by increasing supply.
Others suggest that bitcoin is like the MySpace of social networks, or the Yahoo! of internet companies, and that one of the many altcoins that have grown up in Bitcoin’s wake will rise up and replace the king with a faster, scarcer, more decentralized cryptocurrency.
But at present, Bitcoin remains the backbone of the cryptocurrency ecosystem, and altcoins still act more like experiments — if a new feature is proven to be safe and helpful on an alternate chain, then the functionality can be added to bitcoin.
A new category of safe haven assets
Though the pedigree of gold remains appealing to risk averse investors when disaster strikes, bitcoin offers a completely new approach to a safe haven.
Despite the growing pains of the young market — illiquidity and volatility — bitcoin retains a key advantage over gold in that it can be stored by simply remembering 12 phrases.
This portability gives bitcoin a unique advantage as a safe haven, especially in situations where all other assets could potentially be seized by an authority.