In the aftermath of the global financial crisis in 2008, the allure of so-called “safe haven” assets grew tremendously. Gold is widely considered to be the go-to safe haven asset in times of market turmoil and has become a very popular asset class over the years.
However, recent history suggests that bitcoin may be an even better safe haven investment than gold since it has been known to rally strongly during times of economic and political uncertainty.
In this guide, we will compare the asset classes gold and bitcoin and discuss which one may be the better safe haven investment.
Bitcoin as a Safe Haven
Despite bitcoin’s high volatility, the digital currency is sometimes regarded as a potential safe haven asset during times of market turmoil. While considering a volatile asset a safe haven might sound counterintuitive, there have been a number of instances in the last eight years in which bitcoin has rallied as crisis struck.
European debt crisis: The first instance of bitcoin acting as a safe haven was in March 2013 when the European debt crisis loomed and the government of Cyprus announced that it would bail on all depositors to prevent its banks from collapsing. Following this announcement, Cypriots were prohibited from cashing out their bank deposits and were only able to withdraw small sums of money on a daily basis. During this period, the price of bitcoin doubled from $45 to over $90 and went on to surpass the $200 mark in the weeks to follow.
Every time the European debt crisis reached new heights, the price of bitcoin experienced spikes as more and more individuals wanted to diversify out of the weakening euro and into other currency alternatives. Bitcoin quickly became a safe haven for tech-savvy savers who no longer trusted their banks to securely store their wealth.
Brexit: There have been other instances of bitcoin acting as a safe haven asset. In the aftermath of the “Brexit” referendum, in which the United Kingdom voted to leave the European Union, uncertainty about the financial future of both Britain and Europe caused the British pound to drop substantially and weakened the euro.
During that time, the price of bitcoin spiked. Many individuals moved their money into bitcoin as a temporary safe haven and a currency hedge, while UK-based cryptocurrency exchanges experienced a substantial boost in user sign ups from people looking to trade the BTC/GBP currency pair.
Instability in South America: In countries where economic uncertainty and a weakened sovereign currency are everyday struggles, bitcoin is establishing itself as an alternative store of value and as a means to make payments online. Countries such as Venezuela, Bolivia, and Brazil have seen substantial increases in bitcoin buying in the last 12 to 18 months for these reasons.
The Similarities Between Bitcoin and Gold
Gold’s status as a safe haven investment, on the other hand, is much more established than bitcoin’s. Historically, gold has acted as an excellent temporary safe haven asset due to its perceived value, which is linked to its specific features. Gold is scarce, durable, portable, quasi-indestructible, and has real world uses. Interestingly, bitcoin shares these features with gold.
According to Chis Burniske, buy-side blockchain analyst at ARK Invest, both bitcoin and gold share very similar features as an asset class. Both assets have “an extremely limited supply and a relatively inert state. Bitcoin and gold can both be used; for example, gold is used in electronic circuits and bitcoin is used as payment,” Burniske said. The main difference between the two assets, however, is that gold can be counterfeited whereas bitcoin coins cannot.
Burniske also stated that gold has been a bad investment in the past five years and, for that reason, “people are starting to wonder where there are safe havens to store their assets. I think you have a lot of people saying ‘Hey we want to diversify a little bit’ making allocations to bitcoin.”
Which Asset is the Better Safe Haven?
If the stock market is crashing and you are seeing your portfolio value dwindling, you are probably better off temporarily shifting a large part of your portfolio into gold than into bitcoin. Why? Firstly, gold has a much lower volatility and, secondly, gold is much more liquid, which makes it easier to make a large portfolio shift into gold. Bitcoin, on the other hand, is still very volatile and its exchanges are too illiquid to make large portfolio purchases.
Gold is, therefore, still the better safe haven asset in times of stock market crisis. However, that does not mean it is the better long-term investment.
Should You Buy Gold or Make a Bitcoin Investment?
Historic data confirms that, during times of market turmoil, both gold and bitcoin act as a temporary safe haven. However, there is a clear difference between these two asset classes when it comes to long-term price performance. Gold hit its peak of $1,917.90 in August 2011 and has not come anywhere near this level in recent years.
Bitcoin, on the other hand, has managed to exceed all its highs to reach new all-time highs since its inception in 2009. Bitcoin also surpassed the level of gold’s all-time high price in May 2017. While gold has generated an average annual return of around -4.5 percent in the last five years, bitcoin has generated an average annual return of over 150 percent in the same time period.
The long-term price potential for bitcoin is likely much higher than that of gold. Hence, as a speculative long-term investment, allocating a small percentage of your overall investment portfolio to bitcoin as opposed to gold could likely generate much higher returns for you in the future.
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