Are Gold Investors Also Bitcoin Investors?

April 24, 2019

[This article appears in our May issue of ETF Report.]

During bitcoin’s heyday two years ago, there was a lot of discussion among market observers and participants on whether the cryptocurrency was replacing gold as a favored alternative investment.

There are similarities between the two: Both are decentralized, are nondollar forms of currency and can be traded anonymously. But with bitcoin’s 80% drop in value from its record highs in the vicinity of $20,000 per bitcoin in late 2017, some are skeptical whether the cryptocurrency really has some of the key attributes ascribed to gold—namely as a store of value and an insurance policy in troubled times. Bitcoin now trades around $5,100

Now that bitcoin’s had its day of reckoning, investors’ views toward it as a “digital” gold are evolving. Several market watchers say there’s a little crossover between gold and bitcoin investors, but only when gold is used tactically. Strategically, however, gold retains its title as a top insurance policy in times of trouble. Still, some sources say, as bitcoin and cryptocurrencies mature, they could become digital safe havens once they prove to be less volatile.

Study In Contrasts
In many ways, gold is not simply an investment. People often have an emotional attachment to it, in part because of its 5,000-year history as a store of value, outlasting other investment vehicles over time.

By contrast, bitcoin has only been around for about 10 years. Will Rhind, CEO of GraniteShares, which issues the GraniteShares Gold Trust (BAR), says people’s attitudes about the similarities between gold and bitcoin evolved as the cryptocurrency’s price rose in 2017.

“You’d have people saying, ‘Well, it’s not about the actual coins, it’s about blockchain technology.’ And when the price took off, people started saying, ‘It’s not about the technology, it’s about the coins,’ Rhind said.

“But the one thing that was always going to be a big problem was the idea bitcoin is a store of value. While the price of gold clearly fluctuates, it doesn’t fluctuate like bitcoin. Over a longer period of time, gold has a similar volatility to the S&P.”

While many types of people own gold, there’s a completely different investment philosophy between traditional gold buyers and bitcoin buyers, Rhind says.

“The majority of people who buy gold are of a more conservative nature, and so look at gold as primarily a risk management tool to hedge risk,” noted Rhind. “That’s a fundamentally different mindset from somebody who’s looking to speculate and take advantage of a potential price movement up.”

 

 

Rising prices change people’s attitudes toward an asset, even something as staid as gold. The yellow metal attracted its own share of speculation and price froth in 2011, when values spiked to over $1,900 an ounce, only to see that value nearly halved by late 2015 when prices fell below $1,000/oz. Gold now trades around $1,300/oz.

Tactical Play
Vern Sumnicht, founder of family wealth management firm Sumnicht & Associates, and iSectors, an ETF investment strategist firm, says he owns gold, silver and bitcoin. He says a lot of investors were likely hurt during bitcoin’s price drop and may be out of the market.

He owns gold and silver in coin form, rather than as ETFs, and sees his precious metals as insurance policies in case of economic distress. The bitcoin he holds, which he says is a small amount, is more for speculation.

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