Unless you’ve been living under a rock, you’re aware of the meteoric 2020-2021 rise of Bitcoin (BTC). In a little more than 12 months, BTC prices rallied from COVID-19 panic lows near $5,000 to early 2021 all-time highs just below $65,000. The spike in value was one of the biggest financial stories in recent history. As a result, many professional traders and investors began dubbing BTC “the new gold.”
For active traders, Bitcoin futures are a powerful way of engaging the cryptocurrency market. Let’s take a close look at BTC and how it may be a budding safe-haven asset.
Is Bitcoin the Next Gold?
For thousands of years, gold bullion has been a staple of the world’s economic system. It has played many roles, functioning as money, a way to store wealth, and decoration. Gold has always been in demand, and it has never been worthless throughout recorded human history. Because of its inherent value, the yellow metal has earned a reputation for being the ultimate financial safe haven.
By contrast, Bitcoin is still in its infancy. Invented in 2009 by the anonymous Satoshi Nakamoto, BTC has transitioned from a monetary afterthought to the leader of the cryptocurrency asset class. In its pursuit to enter society’s mainstream, BTC posted exponential gains and demanded the attention of investors worldwide.
The question remains: Is Bitcoin the new gold? Simply put, no. The constitution and market behavior of each asset varies dramatically. However, BTC’s valuation model and tradability are similar to gold’s. Given these attributes, many capital market participants are adding Bitcoin futures to their portfolios.
Valuing Bitcoin and Gold
Physically, Bitcoin and gold couldn’t be any more different. BTC is a human-made digital construct, whereas gold is a naturally occurring element found in the Earth’s crust. Gold is useful as an electrical conductor and as a medium for artwork. Conversely, Bitcoin functions solely as a digital mode of commerce.
Despite their differences, Bitcoin and gold share one important attribute: scarcity. Each is tough to come by, with gold and BTC “miners” allocating significant resources for cultivation. In fact, both assets are viewed as having a finite supply:
- Bitcoin’s code ensures that no more than 21 million BTC will ever enter circulation.
- According to the U.S. Geological Survey, remaining below-ground gold stocks are estimated to be approximately 50,000 metric tons.
Given the inherent scarcity of gold and BTC, asset prices rely largely on demand. In the capital markets, the limited quantities are conducive for the trade of derivatives products, including gold and Bitcoin futures contracts.
Also, the scarcity of gold and BTC have prompted many analysts to make the safe-haven comparison. Although it may be a bit premature to call Bitcoin a safe haven, it does appear to have a negative correlation to the U.S. dollar (USD).
In the 15 months following the COVID-19 market shock of March 2020, the USD Index fell by roughly 10 percent. For the same period, both gold (9.3 percent) and Bitcoin (993 percent) posted steep rallies vs. the USD. From that perspective, an argument can be made that Bitcoin acts as gold does during periods of uncertainty and currency inflation.
One of the great things about capital markets is that there is always a vast array of tradable products. For gold and Bitcoin, each may be traded as follows:
- Physically: A trader may buy and store physical gold. BTC may also be purchased and secured on private servers or flash drives.
- Futures exchanges: The CME offers multiple options for trading BTC and gold. Full-sized gold and BTC futures are available, as well as E-micro contracts for each.
Since their 2017 launch, Bitcoin futures have been an up-and-coming product on the CME. However, the contract specs for BTC were designed with the institutional trader in mind. Extensive margin requirements and a $25.00 tick value limited the number of retail players able to engage the market. Now, the CME Micro Bitcoin provides active traders with a reduced-size BTC contract that is far less capital-intensive.
Gold vs. Bitcoin Futures: Which Is Right for You?
Although BTC and Bitcoin futures have captivated the world of finance, there’s still only one gold. Gold has a track record spanning thousands of years; Bitcoin is a little more than a decade old. If you’re searching for security and a rock-solid risk management device, gold is a vastly superior asset to the fledgling Bitcoin.
For more information on gold, check out Daniels Trading’s The Value of Gold e-book. Written by Daniels Trading’s Craig Turner, The Value of Gold is an essential primer for anyone venturing into the bullion markets.