Bitcoin Surged 160% Amid COVID-19; Is It The New Safe Haven Asset?

Bitcoin has been among the best asset classes after the outbreak of COVID-19. With returns of nearly 160 percent since April, the cryptocurrency has outperformed equities and even gold.

On Thursday, according to CryptoCompare data, bitcoin hit the $16,000 level, indicating that the believers of cryptocurrency are flocking to it during an economic downturn.

The uncertainty induced by COVID-19, that brought about fundamental alterations to business models, consumer behaviour and investment patterns, clubbed with the US elections, caused investors to flock to safe-haven assets. Gold, the traditional safe-haven asset besides the US dollar, has gained nearly 30 percent this year and hit new all-time highs in August, both in the international and domestic markets.

Gold and bitcoin have two things in common, their supply is scarce and they are not linked to any government (or economy), which could have been a factor for the cryptocurrency's surge in value.

However, unlike gold, cryptocurrencies are not recognised or regulated by many major economies of the world, including India.

High risk

Bitcoin gained attention in December 2017, when its valued touched $20,000. It is still relatively new and considered as a non-traditional investment avenue.

More importantly, due to its limited reach, its value tends to see sharp fluctuations.

It is definitely not for an average Indian customer, considering that RBI still does not have clear regulations for cryptocurrencies.

However, investors in India can still put money on cryptocurrency after the 4 March Supreme Court judgement to lift RBI's ban on cryptocurrency transactions.

Gold, a safer haven

A risk-averse investor can still go for gold, even at the current high rates, for investments that are not linked to economic performance. Even if the vaccine were to be available soon, economic distress will persist around the world for another 2-3 years, making the yellow metal attractive.

Further, you will never see gold prices making sharp turns of 40 percent or so within days as Bitcoin does.

For example, Bitcoin rose from $11,427.70 on 14 October to $16,178.60 on 14 November. To provide a context in Indian rupee terms, that is a nearly Rs 4 lakh surge in a month's time.

In comparison, gold prices have surged from Rs 52,285 per 10 grams on 14 October to Rs 52,650 on 14 November, depicting a steady rise.

When the price of an asset rises suddenly, it is bound to see a dramatic correction, making it an extremely risky affair especially for those who cannot keep track of price movements at all times.

Brokerages are also bullish on gold.

"Over the last decade gold in India has given a return of 159%. When compared to the equities Dow Jones has given around 154% and the domestic equity index Nifty 50 has given 93% returns in the same period, which makes gold a star performer and particularly justifying the objective of protecting against inflation and depreciating rupee for Indian investors," said Navneet Damani, head of commodities & currencies research at Motilal Oswal Securities, in a report.

The brokerage further said that in the short term, Comex Gold could form a base around $1,880 - 1,840 an ounce, while rallies are likely to be capped in the range of $1,940 - $1,975.

As for Indian rates, Motilal Oswal has advised accumulating gold with every dip towards Rs 49,500 - 48,500 and sees upside capped around Rs 52,000 - 53,000 per 10 grams levels, in the short term.

"On the longer-term, we continue to maintain our target of $2500 on the Comex and Rs 65,000 - 67,000 on domestic front," Damani said.