In the first weeks of 2025, gold reached a new all-time high, nearing $2950 per troy ounce. This surge was a year in the making, with the price increasing gradually, overshadowed by media attention on Bitcoin, which aims to replace the precious metal in investment portfolios.
Coinpaper investigates the reasons behind the growth of physical gold and whether digital gold can compete.
Is Bitcoin a Good Investment? Evaluating its ”Safe Haven” in Minimal Proportions
2025 began with a sharp increase in gold prices, outpacing almost all asset classes with a rise of over 10%. One reason for this increase is the aggressive purchasing of the precious metal throughout 2024, when demand reached a record 4974 tons. As noted by experts at the World Gold Council in their February report:
“Central banks continued to buy gold at a dizzying pace: purchase volumes exceeded 1000 tons for the third consecutive year, and accelerated sharply to 333 tons in the fourth quarter.”
The economic wars that erupted after US President Donald Trump announced new trade tariffs for several countries likely acted as a catalyst. This topic quickly dominated the information space. As a result, the return on the “main” metal jumped since the beginning of the year, surpassing Bitcoin and traditional risk assets like the S&P 500, which gained 5% and 3% respectively. Bitcoin’s price has seen significant fluctuations over the years, impacting investor gains and losses, but gold’s steady rise this year has outperformed these assets.
This is despite Bitcoin being in arguably its most favorable regulatory period ever. Although in recent months, political and economic circles in the United States have publicly called BTC and other cryptocurrencies the best hedging tool, a “safe haven,” it is still physical, not digital, gold that is showing steady growth this year, outperforming the entire market.
“I really don’t believe that regulation affects the expansion of the blockchain. I think it depends on liquidity and transparency. And the expansion process itself is no different from what it was many years ago when we created the mortgage and high-yield credit market,” said BlackRock CEO Larry Fink during a teleconference on the financial results of Q3 2024.
A month earlier, analysts at the investment company noted the high volatility of Bitcoin and its impact on the Sharpe ratio in portfolios of investors using the traditional 60/40 scheme. The report’s authors recommended holding BTC in portfolios only in minimal proportions.
Thus, Fink and his team emphasized that Bitcoin is useful precisely as a partial diversifier, simultaneously adopting the properties of gold, fiat currencies, and risky assets like stocks. This is illustrated in the chart below, showing the long-term correlations of Bitcoin with gold, the S&P 500, and US Treasury yields.
Understanding Digital Assets
Digital assets, such as cryptocurrencies and tokens, represent a new asset class that has captured significant attention in recent years. These digital representations of value can be stored, transferred, and traded electronically, offering a modern alternative to traditional financial instruments. Unlike conventional assets, digital assets are decentralized, meaning they are not controlled by any single government or institution. Instead, they are maintained by a global network of computers, ensuring a level of security and transparency that is appealing to many investors.
One of the standout features of digital assets is their use of cryptography to secure transactions and storage. This cryptographic security makes digital assets an attractive option for those seeking a secure and decentralized method of storing and transferring value. However, it’s important to note that digital assets are also known for their high price volatility. The value of these assets can fluctuate rapidly, making them a speculative investment. Investors should carefully consider their risk tolerance and be aware of both the potential rewards and risks associated with investing in this new asset class.
What Gold is Saying About Good Investment
Theoretically, gold’s growth separate from other markets indicates serious economic concerns. Some analytical notes consider the sharp increase in demand for the precious metal as a sign of impending stagflation, i.e., a fall in GDP simultaneously with accelerating inflation and increasing unemployment.
The last time something similar happened in the United States was after the abolition of the gold standard in 1971, when rising commodity prices led to a deep crisis.
If we move away from economics and look at gold from a speculative point of view, we can see that in recent years it has been little talked about. Especially compared to the talk about the crazy growth of the stock market, cryptocurrencies, and the technology sector. Who needs a meager tens of percent when you can earn hundreds with the help of chatbots? Bitcoin, like other assets such as stocks, is subject to the same tax implications by the IRS, framing it within the broader category of investment assets.
Analysts at Katusa Research have compiled a chart showing that there is no correlation between the rise in gold prices and its media coverage. On February 1, with a price of $2800 per ounce, the “popularity” of the precious metal was near a five-year low.
“Despite the 70% growth in gold since 2020, its mentions in the news are at an all-time low. The rapid growth of the precious metal seems to have gone unnoticed,” the experts believe.
According to ByteTree founder Charlie Morris, institutional investors are ignoring this opportunity because they are still very confident in securities. The same applies to gold mining companies, whose value is far behind both the stock market and the metal itself.
From Bitcoin Investors’ Perspective
Of course, I would like to indulge the cryptocurrency ego and agree that Bitcoin is capable of replacing gold. And yet, this is unlikely to be the prospect of the coming years. Let’s not forget that gold has thousands of years of experience in the safe-haven market. Bitcoin has been around for less than two decades, and it is still perceived by public and government institutions as an experiment.
But there is one function that the first cryptocurrency can perform on par with gold – long-term savings. Even if the market does not accept other uses of Bitcoin, this is already a working scheme.
If we look at the history of gold prices over the past decades, we will see long growth cycles that indicate its dominance over other markets.
Although there was a strong drawdown by the end of the 1990s, over time the trend towards gold’s dominance returned, first in relation to cash, then to government bonds, and now there is a struggle for the stock market. Of course, an ordinary investor will not see opportunities for growth here – probably only states think on such a scale. But in the long term, gold is an excellent tool that can protect capital in crisis periods of any degree of severity.
This is very similar to what is happening with Bitcoin. In some cycles, some altcoins significantly outperform the first cryptocurrency in terms of returns, but when looking at the long-term trend, it becomes clear that BTC is regaining leadership.
There is no doubt that Bitcoin already acts as digital gold within the cryptocurrency market. Bitcoin’s substantial market cap underscores its significance as the largest cryptocurrency and highlights its importance in investment considerations. However, the horizons of physical gold are incomparably wider, and so far the first cryptocurrency can hardly claim the same place in the global financial system.
Regulatory Environment
The regulatory environment for digital assets is still in its formative stages, often presenting a complex and evolving landscape. In the United States, the Securities and Exchange Commission (SEC) has adopted a cautious stance towards regulating digital assets. The SEC has provided guidance on classifying digital assets as securities and has approved the listing of several Bitcoin exchange-traded funds (ETFs). These Bitcoin ETFs offer a more traditional avenue for bitcoin investors to buy and sell Bitcoin, potentially broadening its appeal among retail investors.
However, the SEC has also issued warnings about the risks associated with investing in digital assets, underscoring the importance of thorough research and understanding the inherent risks before diving in. The regulatory approach varies significantly across different countries. For instance, Japan and South Korea have adopted more permissive regulations, fostering a more favorable environment for digital currencies. In contrast, China has taken a more restrictive approach, imposing stringent regulations on crypto assets.
For investors, staying informed about the regulatory environment in their respective countries is crucial. Changes in regulations can have significant impacts on the value and legality of digital assets, making it essential to keep abreast of any developments that could affect their investment strategies and asset allocation.
This article was originally Posted on Coinpaper.com
