Crypto versus gold: the search for value in a time of crisis

The conflict in Ukraine has sparked a gold rush as investors look to preserve their capital, but rising inflation has raised the question of whether cryptocurrencies can be a safe-haven asset

The price of gold has been flirting with its all-time high. At the time of writing, it was near $2,000 (£1,616) per ounce. The yellow metal had previously crossed the benchmark for the first time in August 2020 on Covid-19 and inflation fears. 

Ongoing market volatility and recent events in Ukraine have sparked a gold rush among nervous investors. This cocktail of caution has crystallised gold’s store of value during a time of crisis and with the spectre of a possible US recession hanging over the markets. 

“Gold trades in a deep and highly liquid market with collective volumes surpassing $120bn a day on average. This, and the fact that bullion carries no credit risk, makes gold a sought-after safe-haven asset,” explains Krishan Gopaul, senior analyst for the EMEA region at the World Gold Council.

Given the recent bull run, a question on the minds of investors will likely be whether now is an opportune time to buy or accumulate gold or whether it’s better to wait for a pullback.

There might be a near-term weakness, but this shouldn’t deter investors, points out Gopaul. “Our historical analysis suggests that gold has reacted positively to crisis events linked to geopolitics. And, despite there being higher price volatility during these periods, gold has tended to keep those in subsequent months.”

While the yellow metal does tend to hold its value in the long term, it performs less well when there’s no inflationary period and markets have confidence in the US dollar. In 2013, for instance, the price dropped 28%, ending a 12-year bull run, as the Federal Reserve reined in fiscal stimulus, which lowered the risk of inflation. 

The case for crypto 

As the economic uncertainty exacerbated by the conflict in Ukraine continues, however, many eyes are likely to be on whether the price of gold can consolidate above the $2,000 level.

The current market conditions are also creating a favourable environment for cryptocurrencies. This is largely because the majority aren’t tied to a single fiat currency, bank or economy and therefore their value can’t be undone by monetary policies. 

Proponents of bitcoin argue that cryptocurrencies are gaining popularity due to their decentralised nature. “For any asset to thrive, trust is the number one factor. If there’s an economic crisis and people don’t trust the government, the value of the fiat currency will drop. An asset’s value depends on a collective belief and trust in the people dealing with it,” says William Je, CEO of Hamilton Investment Management, whose products include a digital asset fund. 

Another part of the attraction of cryptocurrencies is that many – not all – have a finite supply. For example, there will only ever be 21 million bitcoins in circulation and 90% of them have already been mined. 

There have virtually been no periods of high inflation during bitcoin’s decade-long existence, and this makes it difficult to understand its true potential as an inflation hedge

Investors will often base the value of an asset on its scarcity, says Je. There will come a day when there is no more gold left in the ground and this, combined with the technical challenge of mining it, means that the metal is perceived as an attractive asset to invest in. 

It’s still too early to conclude that there’s a collective belief in crypto assets, Je adds, but the trend is positive. 

As this belief continues to grow and the number of cryptocurrencies on the market rises, wealth managers will come under increasing pressure from clients to add crypto assets to their portfolios. Some traditional institutions are already obliging. Morgan Stanley became the first big US bank to offer a bitcoin-only private fund in March of last year, while JPMorgan started offering access to crypto funds a few months later. 

There are plenty of wealth advisers that won’t be opening their door to crypto assets any time soon, though. This is because of the lack of regulation. Here in the UK, the Financial Conduct Authority imposes tight restrictions, including blocking access to crypto-based exchange-traded funds that allow investors to gain exposure to the trend without having to buy the digital assets directly. 

Neither is better or worse

While regulation will eventually bring stability to the crypto market, those investors looking to cryptocurrencies as a potential store of value during a time of crisis need to be willing to ride out any volatility, advises Alessandro Hatami, co-founder of advisory firm and previously COO of digital banking at Lloyds. 

“Investors need to adopt the same mindset as they have with gold, which tends to be seen as a long-term play and not a speculative dip,” says Hatami. 

The investment case for crypto isn’t without its risks, of course. Unlike gold, which is a medium of exchange that has intrinsic value and is often considered a way to preserve capital during a crisis, cryptocurrencies are often bought with a view to capital growth. The problem is, if people simply buy coins without ever selling or trading them, then their value could, in theory, fall to zero over time, especially when a cryptocurrency has a finite supply. 

The fact that the two asset classes can play different roles in a portfolio means they shouldn’t be compared. “Cryptocurrencies aren’t a better or worse way to store value in bear markets compared to gold,” says Hatami. “They simply represent a new way of storing value.”

There are even cryptocurrencies backed by the yellow metal, such as PAX Gold and Tether Gold. Their prices are determined by the real-time value of the physical asset and are generally less prone to volatile price swings than other coins. These gold-backed cryptocurrencies, known as stablecoins, are ideal for investors who want exposure to gold and for whom storing bullion is impractical. 

But, if faced with choosing between holding gold or cryptocurrencies like bitcoin during a crisis and period of high inflation, Gopaul argues that investors should plump for the former owing to a lack of evidence around crypto. 

“There have been virtually no periods of high inflation during bitcoin’s decade-long existence, and this makes it difficult to understand its true potential as an inflation hedge.”