With their meteoric price rises in 2017, cryptocurrencies garnered the attention of even the most unsophisticated investors, and applications beyond the blockchain were explored. Amid the growing hype, some even floated the idea that cryptocurrency could one day replace gold as one of the world's most widely accepted investment assets. After all, the prospect of replacing physical mining that requires heavy machinery, deep tunnels, and chemical pools with computers running code is enticing.
Morningstar analysts created a safe-haven framework to test this theory – putting both gold and cryptocurrency through the five-part test.
Is Gold a Safe Haven Asset?
Liquidity Yes. The market for gold is highly liquid, both for physical and investment assets. Furthermore, with global acceptance of its value, its liquidity transcends national boundaries.
Functional Purpose Yes. Jewellery is gold's single-largest demand category, accounting for more than half of global demand. An additional 10% of demand stems from industrial uses. This provides gold with a clear functional purpose.
Scarcity of Supply Yes. As a mined commodity, there are only so many gold deposits around the world. Over time, "new" gold becomes increasingly difficult and costly to mine, all else equal. Although gold can be recycled, rising prices are typically needed to encourage holders to sell.
Future Demand Certainty Yes. It's often difficult to foresee a seismic change in future demand before it happens. However, based on its long history of use in jewelry, especially given its longstanding cultural significance, which forms the basis of its perceived value, gold has a comparably solid certainty for future demand.
Permanence Yes. Gold does not decay, rust, or expire, and it requires minimal maintenance. Value is unlikely to erode due to weakening quality of any piece of gold.
Assessing Bitcoin Through Our Framework
Now that we've used our framework to confirm gold's safe-haven viability, we now use it to look at the most popular cryptocurrency, bitcoin. Our analysis reveals that bitcoin faces some clear challenges on this front. Weaker liquidity and uncertainty surrounding functional purpose as well as highly uncertain future demand prevent bitcoin from serving as an effective safe-haven currency at this time.
Liquidity No. Market volume appears to be high enough to offer some liquidity. However, current levels of trading see daily volume of roughly 0.5% of all existing bitcoins. Gold averages more than 5 times as much volume, with nearly 3% of all existing gold being regularly traded.
Functional Purpose No. Blockchain has great potential across a variety of use cases, and bitcoin is currently the most popular cryptocurrency. However, the actual usage of bitcoin for transactions is still quite limited and its future uncertain. This is partially because average transaction times still take more than eight minutes to be completed. In comparison, gold has a multitude of noninvestment uses.
Scarcity of Supply Yes. Although there's limited unmined gold reserves, higher prices can justify the opening of new production and the mining of higher-cost, lower-grade deposits. In comparison, there's a definitive total number of bitcoins that can ever be created, thus establishing scarcity of supply that's more powerful than gold's.
Future Demand Certainty No. Bitcoin's future demand is highly dependent on the success of blockchain adoption and, more specifically, the adoption of blockchains that utilise bitcoin as their cryptocurrency. Although the potential of blockchain in general is considered quite high, there remains uncertainty around which blockchain and which cryptocurrency will be the most popular.
Permanence Yes. Existing as lines of code, bitcoins do not face any decay or deterioration that would erode their value, all else equal.
Cryptocurrency Unlikely to Attract Gold's Dollars
Based on our analysis, we think it's unlikely that cryptocurrency will meaningfully attract safe-haven investment dollars away from gold. Many other investment assets, in addition to gold, score higher in our framework.
For cryptocurrency to challenge gold's investment case, we think additional certainty surrounding blockchain's use, additional certainty around the popularity of one cryptocurrency over another, and improved trading volume will be needed.
