Q&A: Think Bitcoin Is the New Gold 2.0? Think Again
SSGA’s gold expert George Milling-Stanley says Bitcoin’s extremely limited track record, exceptional volatility and speculative nature means it does not merit comparison with gold. While gold has functioned as money since at least 200 BCE – and now plays a vital role in the international monetary system – Bitcoin has yet to demonstrate that it can effectively transfer and preserve wealth, and most central banks still do not accept cryptos as a medium of exchange.
Digital currencies remain one of the most hotly debated and polarizing topics that the investment world has discussed in quite some time. Bitcoin ─ the first and most widely adopted among the thousands of cryptocurrencies ─ has dominated the discussion, with some investors even referring to it as “Gold 2.0.”
To provide perspective on the debate over whether or not Bitcoin should be considered the next gold – or if it even has a role in an investment portfolio – I sat down with George Milling-Stanley, Chief Gold Strategist at State Street Global Advisors. George has followed gold for more than 45 years and was part of the team that launched the first gold-backed ETF, giving him in-depth insights on this precious metal.
Here are some takeaways from our conversation about Bitcoin vs. gold:
Matthew: What are your thoughts when you hear Bitcoin being referred to as “Gold 2.0”?
George: Throughout my career, many investors have told me that one of the main reasons they buy physical bullion is to seek to preserve wealth and pass it on from one generation to another. Gold has been a part of human history for at least 6,000 years, and it has functioned as money since at least 200 BCE, when it was used in the ancient kingdom of Lydia. Today, gold plays an important role in the international monetary system as a reserve asset in almost all central bank balance sheets.
Bitcoin was the first cryptocurrency developed, and it has only been on the financial scene since 2009. Until Bitcoin and other cryptocurrencies have demonstrated over time that they can effectively transfer and preserve wealth, I don’t think it’s responsible to call them “Gold 2.0”.
Matthew: Although Bitcoin and gold clearly don’t share the same longevity in track records, do they have anything in common?
George: The main similarity is that they’re both units of exchange that are not controlled by central banks. I don’t think it’s a coincidence that Bitcoin’s inception came in the aftermath of the Global Financial Crisis. That is when some investors started to worry about the future of financial markets because of the unprecedented accommodative monetary decisions made by central banks to prop up global economies.
The other similarity is scarce supply. Bitcoin was engineered to slowly decline to zero growth around the year 2140, when it will reach its maximum capacity of 21 million digital coins. Gold doesn’t have a set date or maximum capacity. Over the past decade, the world’s gold mines produced an average of 3,200 metric tons of gold a year, adding about 1.7% annually to the total stock of gold ever mined.1
Matthew: How does Bitcoin differ from gold in a portfolio?
George: Bitcoin and other cryptocurrencies, or cryptos, were originally conceived as a medium of exchange, not specifically as a portfolio investment asset. However, the extraordinary level of speculative interest cryptos have generated means that few people are willing to use them for purchases for fear that the value of the digital currency might jump tomorrow. Conversely, few are interested in accepting them in exchange for goods in case the value of the crypto drops the next day. As such, cryptos are currently largely speculative counters, with no clear function as a medium of exchange.
In my view, cryptos have no role to play in investment portfolios. This is largely due to their exceptional price volatility2 and the absence of a more predictable return stream. In contrast, gold has historically played an important role in many investment portfolios owing to numerous unique attributes.
Gold has historically demonstrated very low correlations with the other assets found in a typical portfolio, providing an important level of diversification.3 When stocks have lost value in the past, gold has often shown a negative relationship with them.
Since President Nixon severed the final link between gold and money in 1971, gold has delivered returns that are broadly comparable with equities.4 The volatility of the gold price has historically been lower, while cryptos have historically demonstrated volatility levels exponentially greater than that of gold.5
Gold has a long track record of offering preservation of purchasing power. For example, even during periods of low inflation (less than 2%), gold has returned, on average, 8.34%.6
Finally, gold has historically risen an average of 6.30% when the S&P 500 Index experienced peak-to-trough pullbacks greater than 15%,7 a strategic allocation may help to temper the impact of market volatility and reduce portfolio drawdowns.
Matthew: Do similar factors move the price of Bitcoin and gold?
George: At a very basic level, the price of every asset is driven by changes in demand and supply. I believe Bitcoin and other cryptos have become purely speculative in nature, but gold has multiple roles and purposes that influence its price.
More than 50% – approximately – of each year’s gold consumption is in the form of jewelry8
Approximately 8% of gold consumption goes toward industrial applications – principally in electronics9
Approximately 12% is bought as a monetary asset by emerging market central banks,10 and
Approximately 30% is absorbed by individuals and institutions as a portfolio investment.11
Keeping these uses in mind, the price of gold is also driven by a wide variety of factors, including rates of economic growth, movements in foreign exchange relationships, actual and perceived changes in the rate of inflation, developments in mine production, and rates of recycling.
Matthew: How would you summarize your overall stance on the current Bitcoin vs. gold debate, and cryptocurrencies in general?
George: Bitcoin’s extremely limited track record does not merit comparison with gold. It is also really hard to see where cryptos could possibly fit into an investment portfolio, given their exceptional volatility, the speculative nature of current purchases, and the fact that most central banks around the world have not accepted Bitcoin and other crypto currencies as a medium of exchange, due to their lack of a central authority.12
I’ve seen no evidence that Bitcoin or other cryptos have had any impact on the price of gold or on the gold market as a whole. I don’t expect to see it in the future, either. Any comparisons between Bitcoin and gold are simply not apples to apples.
Matthew: What are your thoughts on the blockchain technology that underlies the development of cryptocurrencies?
George: Even if I don’t see a future for these cryptos, I almost certainly see a future for blockchain technology. There are a lot of very smart people currently involved in trying to figure out the optimal use for it; there are even people speculating that the technology could play a useful role in bringing greater transparency to the gold industry.
Presently, the focus seems to be on the possibility of transforming gold into a digital asset, tracking the provenance of gold across the supply chain and introducing greater efficiencies into the post-trade settlement process. Such attempts could help to unleash the potential of the blockchain technology.
Matthew: Historically, global investors have perceived gold as a "safe-haven"13 investment. Does Bitcoin show a similar potential?
George: Practically speaking, due to its relatively short history, Bitcoin hasn’t yet had many opportunities to showcase potential “safe-haven” qualities similar to those of gold. However, it did have two opportunities during Q4 2018 and Q1 2020, when the S&P 500 Total Return Index experienced drawdowns of -15.30% and -33.80%, respectively.14 During these two extreme market pullbacks, Bitcoin simultaneously fell, by -43.70% and -33.30%, respectively. On the other hand, gold posted returns of +5.60% and -3.60%, respectively.15 Since Bitcoin has tended to behave more in line with equities and other risk assets during these periods of market volatility, it is unlikely that investors will look to Bitcoin – or cryptocurrencies in general – as a “safe-haven” investment based on their recent performance.
Contributors: This article was written with contributions from Diego Andrade and Maxwell Gold, CFA. Diego is a Senior Gold Strategist in the Global SPDR Business and Maxwell is the Head of Gold Strategy with State Street Global Advisors.
1 Source: World Gold Council, Gold Demand Trends, December 31, 2019.
2 Source: Bloomberg Finance L.P. & State Street Global Advisors, date as of April 30, 2020; Notes: Bitcoin and spot price of gold 10-year volatility are 121.12% and 12.06%, respectively. Past performance is not a guarantee of future results.
3 Source: Bloomberg Finance L.P. & State Street Global Advisors, date as of April 30, 2020; Notes: S&P 500 monthly correlation to spot price of gold is -0.01 from 8/31/1971 to 4/30/2020 and Bloomberg Barclays U.S. Aggregate Bond Index monthly correlation to spot price of gold is 0.07 from 1/30/1976 to 4/30/2020. Correlation measures the degree to which the deviations of one variable from its mean are related to those of a different variable from its respective mean.
4 Source: Bloomberg Finance L.P. & State Street Global Advisors, date range from August 13, 1971–April 30, 2020. Notes: Spot price of gold and S&P 500 Index returns are 7.86% and 10.44%, respectively. Past performance is not a guarantee of future results.
5 Source: Bloomberg Finance L.P. & State Street Global Advisors, date as of April 30, 2020; Notes: Bitcoin and spot price of gold 10-year volatility are 121.12% and 12.06%, respectively. Past performance is not a guarantee of future results.
6 Source: Bloomberg Finance L.P. & State Street Global Advisors, date range from August 31, 1971–April 30, 2020. Notes: Inflation is measured by Consumer Price Index (CPI).
7 Source: Bloomberg Finance, L.P., State Street Global Advisors, as of April 30, 2020. Notes: Analysis of Gold’s Historical Performance in Market Downturns. 2008 Financial Crisis (06/05/08 – 03/09/09); Coronavirus (02/19/20 – 03/23/20); Black Monday (08/25/87 – 12/04/87); 2002 Recession (03/19/02 – 07/23/02); Dot Com Bubble (09/29/00 – 04/04/01); Gulf War (07/16/90 – 10/11/90); LTCM & Asian Crisis (07/17/98 – 08/31/98);US Credit Downgrade (07/07/11 – 10/03/11); Subprime Meltdown (10/09/07 – 03/10/08); September 11th (08/24/01 – 09/21/01); Flash Crash (04/23/10 – 07/02/10); Trade War/Recession Fears (09/21/18 – 12/26/18). Past performance is not a guarantee of future results. Gold is measured by Spot price of gold ($/oz).
8 Source: State Street Global Advisors, World Gold Council. Average gold demand based on full annual data for the 5 calendar year period from 01/01/15 –12/31/19.
9 Source: State Street Global Advisors, World Gold Council. Average gold demand based on full annual data for the 5 calendar year period from 01/01/15 –12/31/19.
10 Source: State Street Global Advisors, World Gold Council. Average gold demand based on full annual data for the 5 calendar year period from 01/01/15 –12/31/19.
11 Source: State Street Global Advisors, World Gold Council. Average gold demand based on full annual data for the 5 calendar year period from 01/01/15 –12/31/19.
12 Source: World Gold Council, Investment Update – Cryptocurrencies are No Substitute for Gold, January 25, 2018.
13 Assets may be considered “safe havens” based on investor perception that an asset’s value will hold steady or climb even as the value of other investments drops during times of economic stress. Perceived safe-haven assets are not guaranteed to maintain value at any time.
14 Source: Bloomberg Finance L.P. and State Street Global Advisors, date as of April 30, 2020. Q4 2018 drawdown measured from 09/21/18 – 12/26/18 and Q1 2020 drawdown measured from 02/19/20 – 03/23/20. Past performance is not a guarantee of future results. Gold is measured by Spot price of gold ($/oz).
15 Source: Bloomberg Finance L.P. and State Street Global Advisors, date as of April 30, 2020. Past performance is not a guarantee of future results. Gold is measured by Spot price of gold ($/oz).
Blockchain - a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.
Bloomberg Barclays U.S. Aggregate Bond Index TR — A benchmark that provides a measure of the performance of the US dollar-denominated investment-grade bond market, which includes investment-grade government bonds, investment-grade corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities.
CPI, or Consumer Price Index — A widely used measure of inflation at the consumer level that helps to evaluate changes in cost of living.
Global Financial Crisis — The economic crisis that occurred from 2007–2009, which is generally considered to be one of the biggest economic challenges since the Great Depression of the 1930s. The GFC was triggered largely by the sub-prime mortgage crisis, which led to the collapse of systemically vital US investment banks, such as Lehman Brothers. The crisis began with the collapse of two Bear Stearns hedge funds in June 2007, and the stabilization period began in late 2008 and continued until the end of 2009.
Spot price of gold is quoted as a US Dollar per Troy Ounce.
S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
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