As all markets continue to nosedive due to the Corona virus pandemic, it seems that the only asset that shines is gold. Bitcoin hasn’t been able to withstand the selloff.
Driven by panic and uncertainty, it seems investors prefer gold, which has been a store of value for millennia.
But Bitcoin is still better than gold in this case, especially when you look at individuals instead of investors.
Objectivity: Bitcoin vs Gold
If you are asking yourself about the objectivity of this piece, you are right to do so. After all, this is a Bitcoin blog. Nevertheless, the reasoning presented here is based on pure rational analysis.
Here are the characteristics that make Bitcoin an objectively better asset for individuals to hold than gold in light of the Corona virus pandemic:
- Bitcoin is easier to store, exchange and transport than gold
- Although there are some gold-based cards for digital payments like Glint, Bitcoin was specifically designed for P2P exchange digitally
- Thanks to devices like Opendime, Bitcoin has now become an asset that can be used physically
- In the physical world, Bitcoin fares better than gold because dividing it and transporting it to pay for something is easier
- Counterfeiting Bitcoin is impossible; to detect fake gold you need a nitric acid test
- Unless you buy what investors hold, which are gold contracts, ETFs and other derivatives, you will need to test the gold or trust the entity selling it
- Gold has a wide range of purity levels – fineness – which makes the price of certain levels higher than others
- There is no fineness in Bitcoin – unless you are very particular about the transaction history behind the coins you are going to receive, but no one really is
- Nowadays there are cash back services for Bitcoin users that allow people to stack Sats and get better deals on what they buy
Why are Investors Buying Gold as a Response to Corona Virus then?
Looking at this, you might be perplexed by investor thirst for gold. But their logic is not entirely off.
Although Bitcoin fundamentals are clearly superior as a hedge for Corona virus crazed markets, investors might prefer gold for the following reasons:
- It is more widely known than Bitcoin
- Its markets are bigger – about 20 to 25 times bigger than Bitcoin markets by market cap if we take gold markets to be worth anywhere between $2.5 and $3 trillion USD
- Gold contracts and derivatives are more widely accessible than Bitcoin’s
Investing While the Corona Virus Pandemic Rages
This is where the key to those perplexing market reactions lie. There are those who invest and then there are those who use Bitcoin or gold as a personal hedge. In general, investors – including institutions – have more influence on markets than individuals. There is also an issue of leverage in all financial products.
While at the individual level it is more rational to have Bitcoin than gold when it comes to the Corona virus pandemic, most of the money moving around is migrating from stocks and other conventional financial tools to gold markets. As gold prices increase, investors also pull money out of Bitcoin markets to look for higher fiat profit elsewhere.
Ultimately, markets are irrational. Panic or euphoria takes over them and prices diverge more from value.
Investors Face Disadvantages when they Choose Gold Over Bitcoin
Panic in this case is a powerful driver. Whether their thinking is rational or not, it seems that investors are willing to take all the inherent disadvantages of investing in gold:
- Third party custodianship
- Gold markets are exposed to high debt levels that will inevitably increase as governments respond to the pandemic with increased liquidity – fighting panic with a measure that should generate even more panic
- Stock market closures that will prevent investors from liquidating their holdings
- The fact that a part of them are investing in gold derivatives and not gold itself
Individuals on the other hand, might be more worried about getting essentials that might run out. So, they would ostensibly cash out on Bitcoin holdings to purchase these, at least in the short-term.
Bitcoin is Still Better, but Markets are Validating Gold
But if the situation worsens, stock exchanges might face extended closures to prevent complete market collapses. Bitcoin will start to show its superiority if this happens, because its markets never sleep and when conventional markets close, Bitcoin is by definition more liquid.
While people get stuck with gold contracts, ETF holdings or some other derivative, Bitcoin users will be able to do with their coins whatever they please no matter what central authorities will say.
As central banks pump more liquidity into the economy to prevent a complete market collapse, there is also a chance that higher leverage levels within conventional markets will take a toll on gold derivatives, pushing the price of gold down.
After all, gold is more exposed to private debt levels than Bitcoin, which can trigger selloffs if markets don’t recover but remain highly leveraged.
Therefore, in the face of the Corona virus pandemic you have to look at these fundamentals and understand the reasons why Bitcoin is still superior even as markets validate gold in the short-term.