The price of gold this year rallied to new historical highs as the coronavirus pandemic sent equity markets plunging. The safe-haven asset has since pulled back significantly after several pharma companies announced good results from clinical trials for the Covid-19 vaccine.
In the same way, the price of bitcoin also rallied to retest historical highs with the younger generation holding a stronger preference for it than gold. This has led many to call bitcoin the "millennials' safe-haven," a seeming alternative to gold.
The yellow metal has historically been the most proven store of value, especially when global financial markets plunge into a crisis, but its position now appears to be under threat. Whether bitcoin can continue to gain popularity as an alternative safe-haven asset will depend on how well it is received in the mainstream markets, and far things appear to be heading in that direction.
Bitcoin gaining the attention of mainstream companies
Earlier this month, PayPal Inc. (PYPL, Financial) rolled out its cryptocurrency services in the U.S., a move that is seen as a huge boost towards pushing crypto to the mainstream. In another case, the world's second-largest bank by market capitalization, China Construction Bank Corp (SHSE:601939, Financial), issued a $3 billion bond that can be traded for bitcoin.
Both these events, coupled with rising coronavirus cases, boosted the price of bitcoin closer to its historical highs even while gold continued to trend downwards. The price of bitcoin has since pulled back after optimism returned to equity markets following Pfizer Inc.'s (PFE, Financial) and Moderna Inc.'s (MRNA, Financial) announcement of successful clinical trials for Covid-19 vaccines, effectively behaving just like a safe-haven asset.
Thus, the pullback has not deterred bitcoin enthusiasts, as they remain optimistic about the long-term if cryptocurrencies can evolve to mimic gold. However, if you look at resources that provide in-depth bitcoin analysis and insights into the behavior of cryptocurrency prices, it is clear that it could take time before the next bull-run.
The bitcoin challenge
On the other hand, bitcoin still undeniably faces challenges. One of the reasons why cryptocurrencies have failed to gain the trust of traditional (older) investors is because they are highly volatile, which means that despite the frequent bull-runs that the likes of bitcoin experience, it is difficult to predict where the price will be in a year or two. The older generation is less accustomed to and thus more wary of most forms of tech-driven volatility than the younger generation is.
This is also why gold is still by far the most reliable asset when it comes to safe-haven investing. As a precious metal, gold has tangible value. Legendary guru investor Warren Buffett (Trades, Portfolio) once said that the reason he hasn't invested in bitcoin yet is that it lacks intrinsic value.
Since then, the U.S. Internal Revenue Service (IRS) has gone on to classify bitcoin and other cryptocurrencies as capital assets rather than currencies, but this still does not mean that they all now have intrinsic value. In other words, they will never be exactly the same as gold.
Older investors will likely stick to gold
The yellow metal has stood in history as a genuine store of value. You could go back in history and tie every major rally in the price of gold to a subsequent financial crisis. Even after the end of the Bretton Woods system nullified the importance of gold to central banks, investors have always gone back to the basics of safe-haven investing when the economy plunged into a crisis.
Therefore, while some (mainly younger) investors may choose bitcoin over gold when global markets are in a crisis, traditional (mainly older) investors will likely continue to stick to gold and other precious metals. Even today, some central banks are still buying gold in huge quantities in a bid to stimulate their economies. According to data, 79% of U.S. reserves are gold, while Germany and Italy's equivalents are 76% and 71%, respectively.
Data also shows that while global central banks sold more gold than they bought between 1973 and 2007, the tables turned in 2010 and they have been net buyers of gold since. This again shows why the less-exciting gold is a safer investment - there is a much higher chance that people will continue to place a high value on it in the future, even if it shares the major feature of imagined value that drives cryptocurrencies.
Disclosure: No positions in the stocks mentioned.
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