Amid COVID-19 Economic Fog, 'Digital Gold' Bids For Safe-Haven Status | Opinion

Reeling from civil unrest, mass unemployment and the resurgence of COVID-19 cases, the economy faces a "thick fog," according to Fed officials. But unlike previous mega-crises, people are finding refuge this time in an unlikely safe haven—Bitcoin.

The cryptocurrency that can be traded peer-to-peer is often dubbed "digital gold" because there is no central bank authority controlling its supply. That physical gold has outperformed many other investments during the COVID-19 crisis is no surprise. For centuries, gold has rightly been regarded as a premier safe-haven asset. With its price soaring in the last few months to an all-time in late July, gold has only reinforced its reputation as a store of value, the investment to turn to when everything else is uncertain. What catches the eye, though, in this crisis, is how Bitcoin, has also become a go-to safe-haven investment.

Although the stock market has shown incredible (and unexpected) resilience with the NASDAQ continuing to reach new all-time highs, the S&P 500 is roughly flat and the Dow Jones Industrial average is down year-to-date by about 8 percent. On the other hand, Bitcoin and gold have far outperformed most investments, providing strong gains with gold up almost 30 percent and "digital gold" more than 50 percent year-to-date respectively.

Bitcoin's buoyancy flies in the face of advice from world-renowned investors who don't want you to touch the decentralized digital currency that can be sent from user to user on its blockchain network without the need for any intermediaries. JP Morgan CEO Jamie Dimon has called Bitcoin a "fraud," Paul Krugman economics Nobel prize winner labeled it "evil" and the most successful investor of all, Warren Buffet regularly dismisses as worthless the asset that breached $11,000 this week.

But these unprecedented times are seeing investors change their tune. When the central bank started printing money to pump up the economy during COVID-19 lockdowns, pioneer hedge fund investor Paul Tudor Jones responded by advising clients to buy Bitcoin as a hedge against inflation. In a market outlook note from his $38 billion fund entitled "The Great Monetary Inflation," the billionaire said Bitcoin reminded him of gold in the 1970s. That decade, the yellow metal's price soared 2,300 percent amid double-digit inflation.

Bitcoin itself may be just a decade old, have no central authority and be subject to repeated money-laundering and hacking scandals. However, this alternative to the dollar, euro and yuan, which was created in response to the 2009 financial collapse, has now for the first time been stress-tested during a deep crisis. It has come through with flying colors. What's more, despite its history of volatility, the correlation between gold and Bitcoin has been clearer these past few months and has suggested that the cryptocurrency's status as a safe haven may soon be cemented.

The relationship between gold and digital currencies has also been strengthened as financial and technical innovations now allow investors to enjoy the best of both worlds. Bitcoin originally pioneered a new avenue for investment, and now the cryptocurrency and blockchain industry offers "physical asset tokenization." The process of providing ownership rights to a physical asset in digital form can unlock trillions of dollars in industries from real estate to art, and, significantly, now to precious metals. "Tokenization allows the creation of a new financial system—one that is more democratic, more efficient and more vast than anything we have seen," according to a Deloitte study.

With tokenized gold, the digital assets exist on a blockchain ledger but are also backed by physical gold stored in secure, commercial vaults. This actual "digital gold" allows investors to move back and forth between fiat currencies, digital gold, physical gold, Bitcoin and many other digital assets. Gold provides significant global liquidity to what are often illiquid cryptocurrency markets. Digital gold, on the other hand, is also far more portable than physical gold but offers on-demand redeemability.

With the world amid crisis and looking for safe havens in the storm, it should be little wonder people are turning to gold—and to digital gold.

Brian Hankey is an entrepreneur and co-founder of CACHE, a provider of gold-backed digital tokens.

The views expressed in this article are the author's own.