Bitcoin and good have both been used as safe-haven assets, helping investors manage the risks associated with macroeconomic turmoil and market uncertainty. While much has been written about both of these, which one is a better fit for the task?
This article will review some of the costs and benefits of both Bitcoin and gold, weighing how these aspects may affect their appeal as safe havens.
Investors and traders who are looking into getting involved with Bitcoin, gold or both should keep in mind that gold has a deep history. It's been used as a form of money for thousands of years—the first gold coins were minted in 550 BC.
Bitcoin, on the other hand, has been around for a far shorter stretch of time. The first units of bitcoin were mined in January 2009.
Another major difference between the two is what we know about their current and eventual supply.
More than 17.1 million units of Bitcoin are in circulation as of June 2018. Under a set of rules known as the Bitcoin Protocol, the total supply of bitcoins is capped at 21 million, a supply that is not expected to be reached until 2140. The rationale behind placing a hard limit on the total number of bitcoins that can exist was to provide a disinflationary mechanism.
There are other considerations that make the situation more complex. For starters, close to 1 million bitcoins are linked to Satoshi Nakamoto, the pseudonymous creator of the cryptocurrency, and they have never been used.
As far as lost coins go, this figure may be only part of the story. According to an analysis conducted by cryptocurrency research firm Chainalysis, between 2.8 million and 3.8 million units of Bitcoin have disappeared. If individuals don't have the private keys that belong to their bitcoins, they can't use them. If a person stores a bunch of private keys on a hard drive and then throws that device away, that means they can no longer access those units.
As a result, while the total potential supply of Bitcoin is a known amount (21 million), the functional supply (meaning the total amount that is in circulation and accessible to users) is not as straightforward.
Gold's supply situation is a bit different. There are varying estimates of how much gold has been mined and how much of this precious metal still resides within the earth.
According to the World Gold Council, mankind has mined approximately 190,000 tonnes of the precious metal throughout history. Additional figures from this organisation indicate that the total supply increases by between 2,500 and 3,000 tonnes every year.
USGS figures are very similar, stating that 187,000 tonnes of gold have been mined from the earth so far. This organisation estimates that another 57,000 tonnes exist underground.
These estimates of how much gold has been mined from the earth are quite close, helping us zero in on a definitive amount. One variable that could lessen the certainty of gold's supply is the possibility of mining the commodity from space. Should this venture succeed, it could increase the supply of gold. However, some are skeptical that such a thing will ever take place.
While asteroids can contain trillions of dollars' worth of raw materials, bringing these commodities back to Earth would greatly increase supply and therefore cause prices to plummet. This could easily reduce the incentive to mine gold in space.
Further, space mining has thus far been more of a dream than a reality. Until the point that human beings can mine raw materials from space, the supply of gold will remain largely fixed. In addition, market observers have a general idea of how much of this raw material exists.
Because of all this, there is greater certainty around the supply of gold than that of Bitcoin. All else being equal, this certainty may make gold a more appealing safe-haven asset than Bitcoin. Supply plays a key role in determining an asset's price, so knowing how much of that asset is available may make it easier to predict what its price will do during times of macroeconomic certainty.
Regulation is another key concern that could impact whether a person considers Bitcoin to be a better safe-haven asset than gold. The precious metal has been around for far longer, and it has a much more mature regulatory landscape.
In the U.S., for example, the Commodity Futures Trading Commission (CFTC) has jurisdiction over gold, because it is a commodity. The U.K. is set up differently, as the Financial Conduct Authority (FCA) has jurisdiction over many key players in the gold markets, including exchanges, "clearing" banks, wealth managers and bullion banks.
When it comes to digital currencies like Bitcoin, the regulatory landscape is more complex. In the U.S., for example, the CFTC has stated in that it has the authority to regulate digital currencies, issuing a ruling in 2015 that defined these assets as commodities. "In the Order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities," a statement revealed.
"The definition of a 'commodity' is broad," the CFTC wrote in its order. "Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities."
In March 2018, the CFTC's authority in this particular area received some support when U.S. District Judge Jack Weinstein ruled the agency had the authority to regulate digital currencies as commodities.
The U.S. Securities and Exchange Commission's (SEC) jurisdiction over digital currencies has thus far seemed a bit less clear. This government agency stated in July 2017 that some digital currencies are in fact securities, but the status of each individual digital asset will need to be evaluated based on "the facts and circumstances, including the economic realities of the transaction."
The SEC made this announcement around the time it ruled that tokens sold pursuant to one project, named "The DAO" after Decentralised Autonomous Organisation, were in fact securities. This particular project raised 12 million units of the digital currency ether in 2016 before a hacker exploited the code and drained a significant amount of investor funds.
The SEC widened its influence a bit in March 2018 when it stated that any exchanges involved in the trade of digital assets that are also securities should register with the government agency. "If a platform offers trading of digital assets that are securities and operates as an 'exchange,' as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration," the statement read.
The SEC offered further detail in June 2018 when William Hinman, director of the Division of Corporation Finance, said during an industry event that the government agency did not perceive Bitcoin as a security.
The Internal Revenue Service (IRS) has also provided guidance on digital currencies, stating that if individuals invest in digital currencies, these assets are viewed as property from the perspective of the IRS. In other words, investors must report any gains or losses, and pay taxes on any capital gains.
In summary, the CFTC considers Bitcoin a commodity, the SEC has stated that it is not a security and the IRS has declared the digital currency property when it is invested. If this information doesn't make Bitcoin's regulatory situation seem complicated enough, investors should keep in mind that it only concerns one country.
Seeing as how the regulatory landscape for gold appears far firmer than that of Bitcoin, investors looking for a safe-haven asset to protect their wealth during times of turmoil may opt for the precious metal.
Another factor that could easily help differentiate Bitcoin and gold is the logistics involved in transferring these two assets. Gold, for example, is heavy and therefore can be expensive to transport.
Bitcoin does not weigh anything and would theoretically not suffer from this problem. However, its transaction fees have become significant at some points, reaching as much as US$162 in December 2017. Also, the time needed for a Bitcoin transaction to be accepted into a block has surged at some points, reaching 27 minutes in November 2017.
However, all Bitcoin transactions cost the same amount, regardless of their size. As a result, a person could send hundreds of thousands of dollars' worth of the digital currency for a small amount. Transporting that much gold from one point to another is likely to be far more costly and labourious.
Another factor that differentiates Bitcoin and gold is the ease with which they can be divided. Bitcoin can be divided rather easily, because interested parties can send a fraction of one coin to another's wallet.
With gold, however, division can be far more difficult. For the most part, dividing a gold bar would require melting it down and then drying it out in smaller sizes. Investors could potentially buy bars of gold, which are more easily divisible. However, these bars are significantly more expensive than non-breakaway bars.
If macroeconomic conditions reach crisis levels or there is enough geopolitical turmoil to prompt investors to flock to safe-haven assets, divisibility could be highly useful.
When comparing Bitcoin and gold, another major consideration is fungibility, also known as the extent to which one unit of something (for example a unit of currency) can be substituted for another.
As stated previously, gold has been used as a currency for thousands of years. Therefore, interested parties should be able to use one piece of gold just as easily as another of equal size and quality.
When it comes to Bitcoin, the situation may not be so simple. Every Bitcoin transaction is recorded permanently on its blockchain, so if a unit involved in some kind of crime, this information will be available to the public. Some businesses and exchanges have made efforts to avoid units that have questionable histories.
Another key differentiator between Bitcoin and gold is their level of volatility.
Market observers have noted that Bitcoin is more volatile than gold. In fact, Bitcoin was nearly seven times as volatile as gold was in 2017, according to a note Goldman Sachs provided to clients in late 2017.
While Bitcoin and gold have both been characterised as safe-haven assets, there are several key variables that differentiate the two, providing interested investors with key information they can use to select one instead of the other.
For instance, gold has a much longer track record given that it's been used as a form of money for more than 2,000 years. Bitcoin, however, has been around for far less time.
Other differentiators include supply, regulations, transportation, divisibility and volatility. It's important to research and understand these factors before investing in either commodity.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…