Is it goodbye gold, hello bitcoin?

We all look for alternatives and alternates, which may be called “Plan B”, in plain speak. When it comes to investing, we have age-old wisdom of asset allocation to rely on. We are told not to put all our proverbial eggs in one basket but to diversify our capital investments.

Naturally there are also “Plan B” assets called safe havens that are included in an ideal portfolio. These assets not only safeguard our capital when markets are undergoing a challenging time, but also generate alpha (positive returns in absolute rupee terms).

The trade-off is that an investor should be prepared to be patient, as such safe havens can lie in hibernation mode for extended periods—the equivalent of financial Rip Van Winkle. Then suddenly, these hibernating assets roar to life and start sprinting while broader markets languish. For approximately 3,000 years, gold was the ultimate safe haven investment. Mankind has called gold “God's own currency” out of sheer reverence.

It is also true that change is the only constant in life. And technology is only speeding up the process of change. We have so many new assets that were unimaginable as recently as two decades ago. Now we have leveraged indices with multiplication factors of 2x and 3x, ETFs (exchange traded funds) that are electronic receipts for any number of underlying assets like shares, industrial metals, bullion, energy and bonds.

Then, we have the ultimate asset in the brave new investment universe – cryptocurrencies. This is an electronic form of currency that you will not be able to carry in your wallet in paper notes and/or coin form. It will reside in your electronic account accessible from your mobile phone or computer and will be transferable just like any payment wallet like PayTm and Google pay among others.

Cryptocurrencies started as a matter of curiosity about a decade ago and are now a rage, particularly with Gen Z (the younger generation), technology savvy traders who make a lot of online payments. Many companies like Tesla and Tradingview.com accept cryptocurrencies as valid modes of payment. That has increased the popularity of currencies like bitcoin. The anonymity and secrecy associated with crypto currencies is their unique selling proposition (USP).

There are an increasing number of traders and investors who feel crypto currencies are the future of safe haven investing. The additional (perceived) layer of secrecy ensures higher excitement levels and mystique to these currencies. Many crypto enthusiasts go to the extent of suggesting cryptos will dampen the demand for gold as the ultimate safe-haven asset.

Also read | Gold or silver: Which is a better long-term bet? 

Can that really happen?

For any asset to be accepted as a valid currency, it must fulfil a few criteria:

Divisibility – Any currency to be a perfect store of value must be perfectly divisible. Take the Indian Rupee. Every ₹100 currency note will buy you the same goods and services that 10 notes of ₹10 will buy. Which makes the currency divisible with no value lost in the division process. Diamonds on the other hand lose value when cut into smaller pieces. Paper (or fiat) currency meets these criteria, so do gold and cryptocurrencies. As a matter of fact, many popular cryptocurrencies (like bitcoin) are so highly priced that majority of traders buy fractions of this currency rather than an entire unit.

Acceptability – Any valid legal tender (currency) must be acceptable universally for it to be recognised as a legal tender. A 10 gram mini bar of gold is recognised at face value and will fetch the value of 10 grams of gold in the local zaveri bazaar (jewellers market) worldwide. We can encash that gold and buy anything that we fancy with that cash. Can I buy a bottle of coke with a bitcoin? When you ask yourself this question you will begin to see things with a clearer perspective.

Stability – For any legal tender to be popular and be held widely by the population, it must be as stable as possible. You don’t want to go to bed at night feeling all warm and cosy that your cash hoard is worth ₹ 25 lakhs (2.50 million) only to wake up next morning and find the value is down 20% overnight. Paper (fiat) currencies seldom move like this, unless its Zimbabwe dollars, Venezuelan Bolivar or the Argentine Peso. Barring these exceptions, most currencies are rock steady. Central banks work overtime to keep them that way.

Gold is also rock steady most of the time. Like Rip Van Winkle -only to wake up during geo political upheavals. Then, it rewards investors handsomely. Gold wins hands down here at the expense of bitcoin. The latter gyrates unpredictably, which makes it a feast or funeral investment. If you suffer from nerves, avoid Bitcoin for the sake of your health alone.

Safe haven refuge – Investors need a proverbial cave to hide in during times of economic distress. Big ticket investors tend to salt away large sums of money into these safe havens. That includes central banks like our own Reserve Bank of India (RBI).

I don’t see central bankers buying cryptocurrencies, but they are buying gold by the tons.

Read this: Central banks are betting big on gold. Here's how to profit from the trend

Gold has a clear advantage here over bitcoin and other cryptocurrencies.

To sum up the linear comparison – gold wins over cryptos in safe haven buying, stability and acceptability. Both are even in terms of divisibility.

Perceived intrinsic value

Behavioural finance tells us the intrinsic value of any asset is its perceived value at a future date based on some fundamental and/or intangible analysis. There is a lot of investor interest in bitcoin due to the perceived anonymity and secrecy associated with cryptocurrencies. Investors feel that “big brother” (read as governments) cannot confiscate these currencies as they reside on computer servers rather than in any safe deposit vault. The element of secrecy is so hyped that nobody really knows who mined the first cryptocurrency.

Gen Z feels that is so very cool! They think they can buy things on the sly with cryptos, leaving no audit trails. Some high-net-worth investors believe cryptos are ideal as a legacy asset to leave behind for their legal heirs and duck inheritance taxes. The illicit business segment (drugs, sex, terror networks) feels cryptos are the ideal secret invoicing currency to pay for their illegal goods and services on the dark web (parallel illicit internet networks dealing in illegal goods and services).

But recent events have busted this myth like a bunker-buster bomb.

In May 2021, Colonial Pipeline, USA that was an energy transporting Pipeline Company, was attacked by online hackers. The company’s business (100% computer-controlled) was fly-by-wire. Hackers demanded ransom money payable in bitcoin, which Colonial paid up. Unknown to the hacking group calling themselves “Dark Side,” Colonial had notified the FBI (Federal Bureau of Investigation). The FBI recovered a major portion of the ransom money within weeks.

For more such analysis, read Profit Pulse.

Where are we headed?

A basic study of behavioural science tells us our automated responses are resident in the deepest part of our brains. This part is called the limbic brain. If you remember how your sibling scribbled with crayons on your school homework a few decades ago, this data was stored in the limbic portion of your brain.

On the other hand, the feel good factor that you remember from your trading profits of yesterday, that data is stored in the pre-frontal cortex. As the name suggests this part of the brain is in the front, directly behind the forehead bone. It stores short term memory events.

When we experience deep emotional or physical shocks and injuries, the brain switches to limbic functions. That is why you will hear a full grown adult exclaim “oh! maa” when he/she slips and falls down. That is the limbic brain taking over from the prefrontal cortex. Blunt force trauma has a way of unnerving the toughest minds.

And in the financial markets it shows on the price moves on your trading terminals!

Take a look at the technical chart below:

The chart compares the price movement of gold per ounce versus Bitcoin since the war broke out in Gaza on 7 October 2023. Gold is depicted as red (bearish) and green (bullish) candles, whereas bitcoin is depicted as a solid blue line.

If the new age theory of bitcoin being a better safe haven than gold really held true, the chart above would have shown it as such. Note how gold continues its trail-blazing rally to new all-time highs month after month.

Now compare that with bitcoin that peaked in late March 2024. A simple Google search will tell you that Iran entered the theatre of war around that time and actually bombed Israel in April with a barrage of drones and missiles. Bitcoin was already in retreat mode by then. And it has been sliding gradually but noticeably ever since.

In technical analysis this pattern is called a lower tops and bottoms formation. Bitcoin bulls are yielding ground whereas gold bulls in contrast are gaining ground. 

Also Read: Nifty vs gold: Which is a better option now?

Your call to action – I will trust gold over cryptocurrencies every day of the week and twice as much on weekends! Besides, “big brother” (the central governments) world over is thinking of launching CBDCs (central bank digital currencies). And my experience is that big brother doesn’t like competition from private players. Draft proposals seem to indicate CBDCs will be backed by gold among other factors. It seems like a no-brainer.

When it comes to taking sides, one should prefer to go with the winning side. And for me, it's gold!

Note: We have relied on data from the US Department of Justice and Tradingview.com in this article.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your investment advisor. This article is strictly for educative purposes only.

Vijay is the author of the first official commodities trading guide in India. He designs statistical and behavioural trading models for his family owned prop trading outfit. He stays at South Mumbai and trades markets since 1986. He tweets at - @vijaybhambwani and has a video blog at www.youtube.com/vijaybhambwani

Disclosure: The writer and his prop trading organisation have no exposure to gold and/or crypto currency derivatives contracts discussed here as per SEBI guidelines.