Numerous analysts and experts in the economic world have started predicting that there will be a recession in the next years or so. After several years of experiencing a bull market, investors who might be concerned that a recession may be a possibility may be looking for other ways to slowly move their investments into safer territory.
The most traditional move involves using gold as a hedge against stock volatility. History has proven this to be an effective method, but there has been a newer alternative that might give gold a run for its money.
Bitcoin was launched in 2009, and it was responsible for being the start of the era of cryptocurrencies. It is by far and large the top cryptocurrency in the market. Bitcoin shares a lot of properties that real currencies have, but with a lot of unique features that make it a potential investment haven. In the end, though, it will still be up to the investor to determine if Bitcoin will be their designated safe space when the market is in trouble.
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Let us compare how gold and Bitcoin would be as safe havens:
The Case for Gold
Gold makes for an attractive, safe haven for investors due to numerous reasons. It counts as a very valuable material involved in consumer goods like gadgets, electronics, and jewelry. It is also relatively scarce, and no matter how high the demands are, the supply would still be disproportionately low. Unlike company shares or banknotes that could be manufactured or produced if needed be, gold needs to be dug from the ground and go through processing.
Gold also has very little or almost no correlation to other assets and stock indices. It was tied to the US Dollar back in 1971, but since then, those who did not wish to ride stock market swings have decided that it would be better to invest in gold. This valuable metal has historically helped soften the blow whenever there is a stock market correction or decline.
The reason why gold performs well even if there is a stock market correction is that even if gold doesn’t rise, an asset that retains its standing while other assets experience a decline is quite useful as a hedge. And because a lot of people would be of the same mindset and would start investing in gold while they flee from stocks, gold prices will rise accordingly.
The Case for Bitcoin
Bitcoin is a cryptocurrency that makes use of blockchain technology. It has quite a few similarities to gold and has even been labelled as “digital gold” at some point in its history due to its loose ties to other assets, especially stocks. The value of Bitcoin has surpassed the $8,000 mark back at the start of 2020, but what makes it so valuable?
One of Bitcoin’s similarities to gold is that it has a limited supply. Upon its creation, the supply of Bitcoin was set at a hard limit of 21 million tokens. Another aspect of Bitcoin that likens it to gold is that it is not produced or issued by any governing body like a central bank or federal government. Because Bitcoin is a decentralised cryptocurrency, Bitcoin coins are generated with the efforts of “miners”, people on the network who make use of specialised computing rigs to verify transactions. The miners are then rewarded with coins in exchange for their time, effort, and the computing power used. To make sure that there wouldn’t be a surplus of coins, the rewards are periodically halved.
If you have a high-risk tolerance and are looking for a long term investment to add to your portfolio, then investing in cryptocurrencies might just be for you.
Comparing Gold and Bitcoin
1. Transparency and Safety
Gold has hundreds of years-long track records when it comes to the system that it has established for trading, weighing and tracking. It can be very hard to steal gold or to pass it off as fake. Similarly, Bitcoin is also difficult to counterfeit since it makes use of algorithms and encryption methods. However, Bitcoin investors would still need to be wary since there is still no solid infrastructure in place that could guarantee its safety.
2. Rarity
Another similarity between the two assets is that they are both rare resources. Because the rewards for mining Bitcoin are periodically halved, it ensures that the last coin won’t be mined until the year 2104. And for gold, it is currently unknown exactly when we will exhaust all of the gold reserves in the world. There has been quite a bit of speculation that gold can be mined from asteroids, but this is still uncertain.
3. Baseline Value
Aside from being inherently valuable, there have been a lot of uses and applications for gold historically, ranging from jewellery to electronics and dentistry equipment. On a similar note, Bitcoin has had a huge role in introducing the new and innovative applications of blockchain technology. It is thanks to Bitcoin that individuals that do not have access to banking infrastructure and traditional means of finance are able to send money across the globe with minimal fees. As it stands, Bitcoin has a huge potential of being an alternative for those who do not have access to traditional banking products and services.
4. Volatility
Investors have shown concern over the volatility that is inherent in Bitcoin and cryptocurrencies. Bitcoin is especially well-known for experiencing lots of highs and lows. IN addition to that, Bitcoin has repeatedly shown itself to be easily affected by headlines and market whims. This is where gold seems to be much more attractive as a safe haven since it is not tied to other assets and does not have the inherent volatility that cryptocurrencies have.