The battle of gold vs bitcoin continues to heat up as cryptocurrency enthusiasts increasingly describe bitcoin as “digital gold.” Now one firm has developed a cryptocurrency that’s backed by gold, which heats up the gold vs bitcoin debate even further.
Q2 2020 hedge fund letters, conferences and more
In an interview with ValueWalk, Digix co-founder Shaun Djie provided his predictions for the gold price and the benefits of holding gold vs bitcoin.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
Devere Group CEO Nigel Green went so far as to say that bitcoin will replace gold as the go-to safe haven asset within a generation. However, there are benefits to holding both assets, so it's important to consider the differences between them.
Gold vs bitcoin: the debate
One of the more obvious differences is that bitcoin doesn't have the same track record of gold. Recently the two asset classes have been moving in step with each other and even hit a 60-day price correlation high. However, gold has been used as a store of value for over 2,000 years and has proven time and time again to serve as a hedge against volatility in the market.
On the other hand, bitcoin has been extremely volatile since it entered the scene in 2009. The cryptocurrency fell 10% in 2014 due to the Heartbleed bug. The cryptocurrency also fell 22% in November 2019 and plunged 55% in March. Thus, it's important to understand that bitcoin is much more volatile than gold.
One benefit of holding bitcoin vs gold is the fact that its supply is transparent. Both assets have a fixed supply, but it's unclear how much gold is left in the ground waiting to be mined. The global supply of gold has risen about 1% to 2% per year over the last 100 years, which makes it susceptible to inflation because of an oversupply of gold being discovered.
On the other hand, Djie argues that bitcoin is "inflation proof" because it has a fixed and transparent supply of 21 million coins. According to him, it means that typical inflationary pressures that come with overproduction don't apply to bitcoin.
Should bitcoin be considered a safe-haven asset?
Another part of the debate of gold vs bitcoin is that some argue that both are safe-haven assets, but should bitcoin really fall into that category? Djie notes that bitcoin could be considered a safe haven because of its finite supply and inability to be manufactured.
However, the extreme volatility it has faced during its short lifespan, reaching $20,000 in 2018 and then falling below $4,000 a year later, could disqualify it for safe-haven status. On the other hand, Djie notes that the cryptocurrency allows billions of people around the globe with no access to financial services the ability to transfer money efficiently with low fees, which should be factored into the gold vs bitcoin debate.
"While bitcoin hasn’t been in existence long enough for analysts to make definitive statements about its safe haven status, it has tremendous potential as a solution for financial inclusion," Djie said. "Perhaps bitcoin’s true potential as an enabler of financial inclusion is yet to be fully developed, meaning there may possibly be a day where bitcoin reaches the same reputation and safe haven status as gold."
Will bitcoin's strength continue after the pandemic?
Gold and bitcoin have both done well during the COVID-19 pandemic, and many expect gold to continue performing well even after the pandemic, especially if the economic recovery drags on. Djie notes that it's difficult to tell whether bitcoin will continue to perform after the pandemic because of its speculative nature.
"The cryptocurrency’s performance has historically proven to be subject to market whims and hype, such as the cryptocurrency boom in 2017, which boosted a number of digital currencies, including bitcoin, which climbed from a mere $900 to nearly $20,000 within a year," he said. "In 2020, bitcoin prices retreated in May due to speculation that a long-dormant block of the cryptocurrency possibly linked to the presumptive creator of the virtual asset had just changed ownership."
However, Djie also noted that as the cryptocurrency industry continues to develop, more stable alternatives have been created to minimize price volatility. Stablecoins peg a cryptocurrency's price to an external means of value like gold, which is what Digix is pegged to.
"By placing gold in the digital realm, investors can enjoy the accessibility, transferability and convenience of digital assets while being backed by the stable and enduring nature of gold," Djie explained. "In addition, digital gold has the potential to reduce the barriers of entry to the gold market while allowing investors to micro-invest their savings into the world’s most reliable asset."
Bitcoin and gold price predictions
Djie also shared his price prediction for gold. He noted that the economic recovery depends on an effective vaccine being developed and a measured way of reopening the global economy and global travel. He expects continued volatility in both assets until those needs are met. He also noted that the U.S. presidential election will also increase volatility. Despite the volatility, he expects the gold price to reach between $2,000 and $2,100 in the next few months.
"While many may see that gold is surging primarily due to the COVID-19 outbreak, it was already on the rise since 2019 and increased by approximately 20% before heading into 2020," he pointed out.
He added that as the demand for globe has continued to rise around the globe, he has been seeing more and more investors looking for alternative ways to purchase and own gold.
"As such, we are seeing an increased demand for digital gold tokens from the crypto community and traditional fund managers," Djie said. "In fact, we’ve witnessed a 13% increase in holders for our native digital gold token, DGX, in Q2 this year. With DGX selling at a lower premium compared to physical gold, digital gold has attracted more diverse investor profiles to purchase and own this precious metal digitally."