Most of us crypto enthusiasts are well aware of the fact that the government's favorite prescription for any kind of economic downturn is to fire up the printing presses. This rapid inflation of the money supply causes investors to seek out safe haven assets to protect their wealth, so the recent increase in the price of gold and Bitcoin shouldn't be a surprise. What is surprising, however, is the extent to which BTC has outperformed gold as the safe haven asset of choice during the Coronavirus recovery.
Not Another BTC vs Gold Post
I don't want to compare the relative merits of gold VS Bitcoin as safe haven assets. That topic has already been covered in great depth by many authors. Rather, I want to look at why Bitcoin has outperformed gold specifically during the Coronavirus Crisis. This article will be rooted more in political science than it will pure monetary theory or economics.
The "Halvening" - Maybe?
We know that the price of any asset is determined by supply and demand, so it is possible that Bitcoin's rapid appreciation in price was due to the anticipated drop in supply due to the halving. I don't want to go into too much detail, but the "halving" is basically a decrease in the amount of Bitcoins that are generated from mining. This gradual reduction in mining rewards slows the mintage of new Bitcoins and has traditionally been associated with an increase in the price of Bitcoin.
While the "halving" could be one possible explanation for Bitcoin's rise in price, I don't think it is the best explanation. If we look at the graphs of gold price and Bitcoin price side to side, we see that they both hit their relative lows at about the same time. On the 16th of March, BTC hit a price of about $4,903 and at the time of writing is priced at $9,1014. By contrast, gold hit a price of $1,477 on the 18th of March and is now priced at $1,734. In percentage terms, BTC has risen about 83% from its low while gold has only risen about 17%. While it is true that Bitcoin outperformed gold by a considerable margin, BTC and gold shared a similar timing. Because gold and Bitcoin both hit their low at about the same time and started their rise at the same time, this indicates that some extraneous factor must have been affecting both of them (since they moved in step) even though the magnitude of this external event affected both assets differently.
Increased Distrust of The Existing System
The fact that both gold and Bitcoin moved in tandem indicates that both are seen as stores of value. Investors are using both gold and Bitcoin to protect themselves from the massive stimulus and money printing that the government is using to fight the economic impacts of the Coronavirus. In order to tease out the precise cause of why Bitcoin is outperforming gold, I think we have to look at the similarities and differences between Bitcoin and gold. Any similarities between Bitcoin and gold can be eliminated as a possible reason for Bitcoin's higher performance.
As noted in past articles, both BTC and gold have a supply that is not subject to government control. So, although both gold and Bitcoin have a scarce supply, this can't explain the reason for Bitcoin's better performance. Likewise, both Bitcoin and gold can be used as a form of peer to peer money. Bitcoin and gold are both commodity type assets in which there are no earnings or dividends as there are with traditional stocks. Although Bitcoin and gold have many key similarities, I believe that Bitcoin's higher level of security and portability have been the key factor affecting its considerably higher price appreciation than gold.
Let's be honest, the government's response to Coronavirus has been unprecedented. In order to prevent the spread of the virus, the government shutdown large portions of the economy and threw millions out of work. It enforced "lockdowns" and prevented even healthy people from earning a living, engaging in commerce, and peaceably assembling with their friends and family. Whether these measures were justified is the topic of another discussion, but it is sufficient to say that such measures were seen as a radical departure from the freedom that we have become accustomed to. In many people's eyes, the government's response to the Coronavirus was not just a fiscal and economic disaster, but also a warning that the government is more than eager to disregard many of our civil liberties and rights.
Thus, I suggest that many people were looking for a safe haven asset that would not only protect them from the government's money printing and inflation, but also an asset that would protect them from government overreach and disregard for our traditional liberties. On one hand, gold has been a stable store of wealth since ancient times. It is a very good monetary safe haven, which explains why gold performed so well in the aftermath of the 2008 financial crisis. While owning gold is a great hedge against monetary and economic uncertainty, it also requires that the government honor private property rights and the ability to own gold.
During the Great Depression, FDR ordered the citizens to surrender their gold and replaced it with fiat currency. While gold may indeed have been a good hedge against inflation and currency devaluation, it can't fulfill that role if it has been confiscated by the government. I believe that the unprecedented nature of the lockdowns spawned many conspiracy theories and caused many people to fear the worst. In their minds, the government was losing respect for citizen's rights, so it made no sense to invest in an asset like gold that could be easily confiscated. Again, I want to be clear that this is not an indictment of gold's ability to protect against inflation. Rather, the unique circumstances of the Coronavirus caused a situation in which many people believed they needed an asset that could offer economic protection but couldn't be seized or confiscated .
In a sense of panic, many people resort to the fight or flight response. In both cases, BTC offers several advantages over gold. Gold must be stored in some physical location. Because it must be stored in a physical location, this means that it can me more easily found and confiscated. Transporting large quantities of gold while "bugging out" would be cumbersome and also carry the possibility that the gold coins will be lost while moving from one safe area to the next. On the other hand, gold also has several disadvantages for people looking to flee. Gold must be declared and checked when crossing international boundaries which means that it could be seized or confiscated. By contrast, Bitcoin exists only in cyberspace. It is weightless and can be transported anywhere in the world without anybody noticing.
As with any economic phenomena, it can be difficult to identify the exact reason that Bitcoin has outperformed gold by such a large margin. The "halvening" has made Bitcoin relatively more scarce, which could have provided a boost to the price. The Coronavirus shutdowns accelerated the transition to a digital economy and many investors could have purchased Bitcoin hoping that the digital currency would benefit from the increased interest in all things digital. In contrast to gold and cash, Bitcoin doesn't actually physically change hands during transactions, so Bitcoin could have benefited from people's fear about transmitting the virus through toughing infected currency.
While these, and many other, explanations are certainly possible, I believe that Bitcoin outperformed gold because people felt that Bitcoin could offer protection against both economic AND political uncertainty. Although gold has a stellar track record of protecting from inflation, many people saw the government's lockdowns and crackdowns as an indication of impending political turmoil. In my opinion, this caused many people to look for an asset that would not only protect against inflation, but would also be easily portable and easy to hide from prying eyes.