March 5, 2017    4 minute read

Mortal Combat: Bitcoin versus Gold

Safe Havens?    March 5, 2017    4 minute read

Mortal Combat: Bitcoin versus Gold

For many decades, gold has been known as a safe haven in case of stock market collapses. However, an upcoming rival to this status arrived when bitcoin was introduced on 31 October 2008 by the mysterious Satoshi Nakamoto. This so-called cryptocurrency was most often directed to some underground industries, often grey areas in terms of legality (like their use in the purchase of firearms, drugs, and other criminal practices on the ‘deep web’).

Risen from the Underground

Until recently, the currency was attractive for this kind of black market transactions (Especially in 2013), since it was hard to trace where transactions were directed. Since its introduction, bitcoin’s price has seen an incredible surge, as can be seen from the graph below:

Source Bitcoin Charts

Bitcoin is also known for some less clandestine reasons, of course, like its innovative features, simplicity, and transparency, leading to an increasing popularity among mainstream investors. These two sides of the coin meant that from an initial value recorded near zero to its first large increase in July 2010, the value of each coin jumped from $0.0008 to $0.08. The price of bitcoin has been appreciating ever since (with of course some rallies and crashes) to reach a total current value of approximately $1270.

Nevertheless, the currency can still be questioned in terms of stability, security, and ethics. For a start, the average volatility of bitcoin is more than that of gold and other currencies. Moreover, the lowest monthly volatility of bitcoin is less than the highest monthly volatility of gold and the other currencies.

In theory, bitcoin should be less sensitive to shocks and trends if it were to have much use for true value storage. On the other hand, it is found that the currency acts as a strong safe haven in the Asian markets. A graphical overview of the volatility of the Bitcoin can be found in the graph below:

Source: Social Science Research Network

An Update on Gold

On the other hand, gold (as tracked by GC1:COM) is more stable. It is also possible to draw logical relationships between its price and market behaviour, for example by setting it off against the S&P 500 index. The current price of gold is around $1,228, and it usually fluctuates with bullish and bearish trends in the market. The graph below shows the price changes of gold over the recent years:

Source: Bloomberg

Gold versus Bitcoin

Last Thursday, the news emerged – unimaginable just a few years ago – that the price of bitcoin surpassed that of gold for the first time in history. This can be seen in the chart below:

The large question remains if this upward trend will for bitcoin, which is up by 33% since the start of this year and 200% since the same time last year, and if this currency could ever be as stable as gold (or least as stable as gold used to be). Of course, a stable or ‘safe haven’ commodity such as gold is hard to compare with a currency that is sensitive to fluctuations and shocks – as can be seen from the previous graphs – and, above all, one that is so different in nature.

To make matters more complicated, bitcoin’s upward movement can be partly explained by the fact that many investors use the currency to more easily fly capital out of China and thereby pass around strict regulations that have been implemented by the authorities. Furthermore, some recent developments have been going on regarding bitcoin and blockchain: a proposal is currently under consideration by the SEC that would include the creation of a supportive exchange-traded fund that is related to the currency.

The decision regarding the proposal is expected to be made on March 11th. It could explain some of bitcoin’s recent strength insofar as an expected decision has been priced into the markets, and a positive decision would likely lead to further increases in the cryptocurrency’s value. Nevertheless, the future is always a large question mark for such an unusual currency, and something that is worthy of debate.

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