Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
The global economic outlook was shaky before the COVID-19 pandemic as investors had been moving towards gold as a hedge against uncertainty. Now, this behavior has been amplified, and investors are flocking to gold — and its proclaimed digital counterpart, Bitcoin. Where do these two assets stand in a post-pandemic world?
Gold and Bitcoin Rally to Weather the Storm
The effects of the pandemic — whether on the layperson or investors — have been talked about extensively. Short-term effects were harsh and medium to long-term effects more uncertain — but still worrying. Investors shifted their capital greatly during the COVID-19 stock market crash in March, but it has somewhat settled since then.
Some might say that the pandemic has only aggravated deep-seated problems that were bound to show itself sooner or later. This perhaps explains why there was a trend towards these asset classes (the March crash did affect both markets, but they corrected more quickly).
But if there’s one absolutely certain aspect, it’s that investors have begun to view both cryptocurrencies and gold in a different light. There is demonstrable proof that people are flocking towards these assets because they are hedging against inflation — and uncertainty.
Seeking a Safe Investment in Troubling Times
Analysts are already suggesting that economies are not recovering at a pace that’s commensurate with reality. While businesses appear to be functioning, they are operating on fumes that could very well ignite.
Stimulus packages have also injected far too much cash far too soon. While they have brought some temporary relief to the markets and households, they do more harm in the long run. Hyperinflation might be the worst-case scenario, but it is not an impossible one.
These sudden changes have forced even high-profile investors to reconsider their positions. The pandemic has made the public aware of the weaknesses of economies. As such, investors have turned to markets that have either shown hedging potential in the past or for the future.
By that, we mean gold and, well, digital gold — Bitcoin. These two asset classes have been compared in the past, often in the context of being a safe haven.
Gold has been a safe haven throughout history, while Bitcoin shows much less correlation than other asset classes. We’re also seeing increased access to Bitcoin, as the majority of the leading stock trading apps offer access to Bitcoin and other popular cryptocurrencies.
Investors appreciate that potential in diversification. This is the primary reason why investors have increased their positions in these assets.
COVID as the Perfect Storm for Bitcoin and Gold
All the evidence regarding the interest in these assets is there in numbers. Gold has grown nearly 17% in the first half of 2020, while Bitcoin has more than doubled in value since the March crash.
Gold even hit a historical high of $2,061 in August 2020. In fact, the only asset class gold didn’t outperform was cryptocurrencies itself. While gold has settled a little lower, it’s showing good strength as a hedge going into years of uncertainty.
Bitcoin, meanwhile, is on the verge of a substantial bull run, according to many analysts. It has proven itself time and again as an uncorrelated asset, and this belief has strengthened among the wider public. This is why more institutional investors have entered the market — and some with billions of dollars of assets under management.
Considering that the market’s current state may not be a result of a real recovery but temporary and artificial solutions by governments, the crypto and gold markets continue to be good choices for the cautious investor.
So, does all of this mean bitcoin and gold are the only assets worth looking at? Of course not. Many undervalued stocks are floating in the market at the moment. But it is true that there is a far less predictable outcome in the case of stocks.
It is likely that global markets will undergo waves of recovery and retraction, before evening out a few years into the future. Some optimistic projections suggest 2021 as being the year when things return to normal, while others put it as far out as 2024.
In any case, the best thing one can do in a period of uncertainty is to diversify wisely, and both bitcoin and gold offer solutions there.
What do you think of Bitcoin and gold as safe havens? Do they complement or compete with each other? Let us know in the comments below.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.