They’re looking for “safe haven” assets that will preserve value. Gold is one of the classic safe haven assets, in part because it’s durable, portable, divisible… and finite.
When the J pattern appeared in Bitcoin in late 2015, Bitcoin soared 7,247% in the next 18 months. Today, the same J pattern flashed in a tiny crypto one crypto insider calls the “New Bitcoin”.
And – like Bitcoin in 2015 – this tiny crypto could soar hundreds of percent, if not more, in the coming months. Continue reading here.
It has maintained its value throughout wars, recessions and the decline of empires. Although the price of gold changes constantly, gold has never been worth nothing.
Every ounce of gold that’s ever been mined still exists and is still worth something. In fact, it’s worth as much as new gold that’s mined today.
Ray Dalio, founder of Bridgewater (the world’s largest hedge fund) has often said, “If you don’t own gold, you know neither history nor economics.”
But gold isn’t like owning stocks or shares. You should view gold as insurance, not as an investment. It’s a way to hedge yourself against the possibility of catastrophe.
You see, gold is uncorrelated or negatively correlated with other assets. So during times of market stress, gold doesn’t bounce around like stocks or bonds might.
(Correlation is the relationship between two or more assets. It measures what happens to the price of one asset when the price of a different asset changes. When they are negatively correlated, their prices move in opposite directions. This evens out your overall performance when things get bumpy. But when they’re positively correlated, it can multiply the volatility of your portfolio.)
Cryptos like bitcoin share some of gold’s characteristics
Bitcoin is often compared to gold. Many bitcoin supporters have even nicknamed it “Gold 2.0”
They’re both widely distributed, decentralised methods of exchanging value as currency.
There is no central authority like there is with U.S. dollars or other paper currencies. Neither bitcoin nor gold can just be “printed” at the push of a button. You have to either earn your gold by mining it – you also have to mine bitcoin, but with computers instead of picks and shovels – or you can pay cash for it.
But here’s the thing: Despite their similarities, gold and bitcoin are at opposite ends of the investment spectrum.
Bitcoin, while sporting the word “coin” in its name, is a purely digital currency and no physical coins actually exist. Gold, a mineral, has zero digital properties and is frequently minted into coins.
And gold has offered safety, security and insurance for centuries… while bitcoin has the potential for spectacular gains (with a lot of volatility) and is less than a decade old.
So are cryptos a safe haven asset?
The jury is still out. There’s not enough data about how cryptos perform during times of financial stress – that is, big-time collapses in markets. Will they follow stocks and bonds in a crash, or will they soar as people pile into them? It’s too soon to tell.
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But there’s a big problem with bitcoin with respect to its safe haven status – for new investors it can be very difficult to buy.
And as University of Western Australia academic Lee Smales writes in a recent paper titled “Bitcoin as a Safe Haven: Is It Even Worth Considering?”:
“For an asset to truly act as a safe haven then we must be able to buy and sell the asset quickly, at a known price, and at relatively low cost. That is, in addition to analysis of return correlation, it is also vitally important to consider elements of price discovery and liquidity.”
In short, for something to be considered a safe haven asset, you have to be able to get in and out of it quickly and easily. You generally don’t run out and buy a house when stock markets are crashing… in part because it’s not easy to buy, sell or assess the value of.
That’s great advice. But in crisis conditions such as an equity market collapse or extreme inflation, liquidity of any asset will always be in jeopardy.
As for being quick and easy to get into and out of… it currently takes around 10 minutes for a bitcoin transaction to process. During periods of heavy traffic, it can take even longer. And when lots of people are trying to sell, transaction fees can skyrocket.
For example, towards the end of last year, we saw bitcoin transaction fees spike dramatically, with median transaction fees hitting US$34, and average fees hitting US$55.
During the bitcoin boom late last year, people looking to process large bitcoin transactions were prepared to pay far higher transaction fees to guarantee their transactions were processed.
So as Smales concluded:
“The empirical results suggest that, relative to traditional assets, price discovery is more difficult, volatility is significantly higher, liquidity is significantly lower, and costs are higher in terms of time and fees for Bitcoin markets. There are also additional complications in terms of processing capacity during periods of high demand and potential security issues that are unlikely to provide comfort for investors seeking to reach a safe haven. Taken together, the results do not offer any confidence that Bitcoin would be able to act as a safe haven should a crisis occur anytime soon.”
This is why you should still own cryptos
Cryptos are the ultimate in freedom of asset ownership. The government can’t confiscate them (like it took gold away from its owners in 1933).
You can cross national borders with cryptos in your possession on a USB-stick device, a piece of paper… or if you can memorise your private key, with no physical object in your possession of any kind.
Whether your crypto portfolio is worth US$100 or US$100 million, it makes no difference to how you move and store it (which is clearly not the same with gold). You don’t need a trusted middleman to send it, and you can move it around the world, securely, in a matter of minutes.
So gold and cryptos like bitcoin both deserve a place in your portfolio.
I own bitcoin the same way I own gold. Locked up, out of sight and out of mind.
Gold has stood the test of time and is a medium of storing value. For that reason, it deserves a place in your portfolio. Bitcoin’s time on the other hand, is just beginning. Cryptos are the future, and when you have an opportunity to buy the future and tuck it away, you should take it.
P.S. What cryptos should you own… and when? We’ve put together a book – it’s a very easy read – that explains this. It’s easier than you might think. Learn more here.