Justin Chan Dr Chan founded DataDrivenInvestor.com (DDI) and is the CEO for JCube Capital Partners. Specialized in strategy development, alternative data analytics and behavioral finance, Dr Chan also has extensive experience in investment management and financial services industries. Prior to forming JCube and DDI, Dr Chan served in the capacity of strategy development in multiple hedge funds, fintech companies, and also served as a senior quantitative strategist at GMO. A published author at professional journals in finance, Dr. Chan holds a Ph.D. degree in finance from UCLA.

Is Bitcoin An Effective Substitute For Gold ?

6 min read


During the first week of March this year, a momentous event took place – the price of bitcoin surpassed gold price on a per-unit basis for the very first time.

Although this was largely an arbitrary occurrence, given that one bitcoin has no meaningful relationship to one troy ounce of gold, it was nevertheless a mark of how far this new, hotly-debated digital currency had come during its eventful eight or so years in existence.

Since then, of course, bitcoin has tripled in value, and is currently sitting at its all-time highs. A growing chorus of analysts now predict that this could just be the beginning of a spectacular bull run. Gold, meanwhile, has been a much steadier prospect over the last few years. And while 2017 has seen the precious metal’s price rise by a respectable 10% to date, bitcoin is up by a whopping 250%!

Given the clear divergence in price paths, you might be inclined to conclude from the outset that the two assets have little in common.

On closer inspection, though, both gold and bitcoin share a distinct set of unique properties. Indeed, it is the very fact that bitcoin operates in a not too dissimilar fashion to gold – and the gold standard – that gives it a distinct appeal for some of cryptocurrency’s biggest proponents. As a matter of fact, the extent of their similarity can be gauged by the fact that some believe bitcoin is fast becoming a preferable substitute for gold. While some investors may have decided to gain exposure to gold for specific reasons once upon a time, they are now opting for bitcoins for those very same reasons.

So how are they alike?

Firstly, they both have a finite supply, which means that unlike other assets, neither gold nor bitcoin can simply be created out of thin air.

Warren Buffett once famously said that the world’s total amount of gold already above ground could fit into a cube with sides of just 67ft. Given that Bitcoin is a completely digital asset, its total global quantity takes up even less space: zero!

Both are “mined” in their own way – gold is done so from the earth, and bitcoin is done so by digital means.

And both are independent stores of value – that is, they don’t rely on central banks or governments to determine their value, unlike fiat currency which can be printed at will.

As such, both gold and bitcoin present two of the very few decentralised methods of exchanging value as currency, with neither able to simply be “printed”. This independence enables both gold and bitcoin to be impervious to the effects of inflation. While the printing of money erodes the value of fiat currency, the supply of neither gold nor bitcoin can be increased in the same way, which allows both assets to maintain their value indefinitely.

It also appears that a hefty chunk of demand for both assets has been inspired by a heightened sense of uncertainty which has pervaded throughout traditional financial markets in recent times. This explains why gold is frequently described as a “safe haven” – one that is either uncorrelated or negatively correlated with other assets, such as stocks and bonds. Gold is likely to retain its value or become more valuable in times of market turbulence, when other assets are collapsing.

Take the global financial crisis as an example – between June 2007 and March 2009, the Dow Jones lost close to 50%, as did many other stock markets around the world. Gold, meanwhile, rose by about 40% during this period.

Or how about Brexit – last year’s referendum result induced much panic in the ensuing 24 hours. The UK’s FTSE 100 dropped by 12.5%, the S&P 500 shed 3.6% and the MSCI World Index lost 4.9% respectively. But gold was one of the very few winners on that day, rising by around 5%.

And neither is it a coincidence that demand for gold-backed ETFs hit the second-highest annual amount on record in the same year that pronounced market uncertainty abounded in the wake of Brexit and the election of Donald Trump.

Again, gold’s suitability as a safe haven is underpinned by its finite supply – it can neither be printed (unlike fiat currency) nor easily destroyed, which makes its availability somewhat dependable – and its value difficult to diminish. So, during times of uncertainty, gold tends to preserve capital and protect against potential future risks.

Bitcoin ostensibly offers the same protection to investors. While there isn’t as much empirical data to firmly support the notion that bitcoin has behaved as a safe haven asset, its scarcity makes it ideally suited for this purpose. Only 21 million Bitcoins will be mined in total; after that, no more will be created. In fact, once this threshold is reached, bitcoin will become even rarer than gold, as more of the yellow metal will continue to be extracted off the ground.

But There Are Differences

Earlier this year, the precious metals custodian and investment firm Goldmoney compared the volatility of the two assets over a two-year period, along with a handful of currencies. The results were abundantly clear:

bitcoin volatility
Annualized standard deviation of daily returns, 30 day rolling (Source: Goldmoney)


Bitcoin’s volatility is several orders of magnitude greater than gold, as well as every other asset classes.

Bitcoin’s often violent price swings make it highly unsuitable as a stable form of money. It also renders the “store of value” argument effectively redundant. Sure, putting your putting your money into bitcoin during periods of higher risk may protect it against inflation. But what use is that if the value of bitcoin itself is so excessively erratic?

What’s more, much of that volatility can be attributed to the ‘trials and tribulations’ that bitcoin has undergone during its short lifespan. It has already been lumbered with a lot of bad press, which has underpinned some of the boom-bust cycles it has experienced thus far.

During its early existence, it invited a whole heap of black market activity, especially into the infamous bitcoin-powered underground marketplace Silk Road, which had to close down in October 2013. And then Mt. Gox, the world’s biggest bitcoin exchange at the time, filed for bankruptcy and shut down after being hacked for $460 million worth of the digital currency.

Such a checkered history continues to pose major question marks over bitcoin’s stability and reputation as a legitimate investment product. While it holds the benefit of being secured by the blockchain, which provides security when transactions are being made, some of the world’s biggest exchanges continue to be vulnerable to hacks.

That being said, volatility remains the lifeblood of financial markets – it enables investors to earn supernormal returns in a short span of time. And that makes bitcoin, and indeed most other cryptocurrencies, such attractive investment opportunities. This is the crucial argument in favour of Bitcoin – as a lucrative investment, it has clearly outshone gold over the last few years. Indeed, it has been the world’s best-performing currency of both 2015 and 2016 (beating every fiat currency in operation), and looks well on course to be the winner this year as well.

It would seem things are only going to get a lot better as we unleash the potential of blockchain – once the technology is discovered by more people, more companies, more central banks and more governments – the demand for cryptocurrencies could well take off.

Gold, however, has rarely proven to be an investment that delivers superior returns over a consistent period of time. A recent analysis shows that in the last 40 years, the precious metal has only topped the annual performance table of common US assets on 6 occasions. That puts it behind commercial real estate (REITs, 11 times), foreign stock markets (9 times) and US equities (7 times). Moreover, it has been the worst performer no less than 9 times, which is worse than for any other major asset classes.

This reinforces the view that few investors choose gold in hopes of reaping huge gains; rather, it is sought after for safety purposes during times of market turmoil. Bitcoin, on the other hand, could offer all the features of a desirable safe haven asset and be chosen as an attractive investment in its own right. Although only time will tell, if such a hypothesis holds true, then a concerted switch by investors from gold to bitcoin may well transpire.

walking original

The digital nature of bitcoin also makes it favourable vis-à-vis gold. Ownership of bitcoin can be transferred directly between parties with little effort and cost. Bitcoin trading is a straightforward process, requiring little more than the “address” of your trading counterparty and the requirement to pay a negligible transaction fee. Transferring gold ownership, however, requires the payment of management fees, particularly when buying gold-backed exchange traded funds; while buying physical gold also requires delivery, storage in a vault or safety deposit box, and insurance in many cases, all of which incur sizable fees.

Complements rather than substitutes?

Is Bitcoin’s astronomical rise in recent months happening at the expense of gold?

Some believe so. “Cryptocurrencies are cannibalizing demand for gold,” was the assertion by Fundstrat Global Advisors. Fundstrat sees Bitcoin skyrocketing to at over $20,000 by 2022, and under the most bullish test scenario it could head as high as $55,000 over the same period. Clearly if such predictions are true, it would make the cryptocurrency a much more attractive prospect than gold. And imagine if central banks soon start buying up Bitcoin, similarly to the way they accumulate gold reserves at present. That would surely be a game changer.

But does gold still have a place in investors’ portfolio? Absolutely. Gold is almost certain to be around 100 years from now. The metal’s permanence is reflected in its real-world tangibility. It has survived for 5000 years as a currency, and is likely to do so for many more years. The same can’t be said for bitcoin with anywhere near as much certainty, which has generated more controversy in the last 8 years than gold has in the last 50 years.

Even in today’s market, gold remains responsive to market uncertainty – Trump’s recent “fire and fury” threats regarding possible military action against North Korea, for instance, has prompted considerable buying of the yellow metal. And while gold is still considered to be volatile, its lack of volatility compared to bitcoin will continue to be a highly sought-after feature for those simply wanting to maintain the value of their funds in a tried and tested manner.

Ultimately, it boils down to investor preference. While bitcoin and gold do share a lot in common, there are also distinct differences that make one more appealing than the other. If you’re looking for somewhere to park your money for the long term, gold continues to be a proven safe haven solution, as do other precious metals such as silver, platinum and palladium. But if your investment horizon is more short-term, and/or you are less averse to volatility exposure, then bitcoin or a number of other cryptocurrencies may well be the answer.

So rather than substitutes, perhaps a more accurate way to describe the relationship is complementary. Thanks to bitcoin’s ongoing propulsion into the mass consciousness, investors now have a wider range of assets from which to make a choice. The future may hold even more options; for instance, the UK’s Royal Mint will soon introduce a gold-backed cryptocurrency – a tradable digital token that represents ownership of physical gold that is held in the company’s vaults. Such a product would be a hybrid solution, combining some of the best features of cryptocurrency and gold. We will have to wait and see how this would play out in the real world.

Justin Chan Dr Chan founded DataDrivenInvestor.com (DDI) and is the CEO for JCube Capital Partners. Specialized in strategy development, alternative data analytics and behavioral finance, Dr Chan also has extensive experience in investment management and financial services industries. Prior to forming JCube and DDI, Dr Chan served in the capacity of strategy development in multiple hedge funds, fintech companies, and also served as a senior quantitative strategist at GMO. A published author at professional journals in finance, Dr. Chan holds a Ph.D. degree in finance from UCLA.