Gold has been a highly popular tool for hedging against investments in currencies, commodities and other financial instruments. Hedging allows investors to offset losses in an asset class, generally currencies and stocks. But recent months have seen investors look towards cryptocurrencies as a possible hedging tool. The astounding rise in the values of Bitcoin and other cryptocurrencies has attracted many investors, who believe that cryptos can prove to be an effective hedge against the instability in the prices of fiat currencies. But, do cryptos really qualify as an effective hedge against losses?
Gold has been seen as a safe haven by investors over the years, whether it was the financial crisis of 2008, the stock market crash or the Eurozone crisis. Gold prices have continued to rise over time, even when the world economy faced severe financial problems. The price of gold more than doubled from $869.75 in 2008 to a record high of $1,895 on September 5, 2011. But gold prices too are speculative and can have high peaks and low valleys. We can gauge this from the fact that gold price as of April 2018 is hovering around $1,300 per ounce.
Gold has proven to be an effective investment in the long run, mainly because it is the standard on which the value of all money is based. In addition, the weakness of the fiat currency system has made investment in gold quite popular. Gold provides a safety net against currency depreciation. So, can cryptos do that too?
Looking at the features of various cryptocurrencies, it is difficult to envisage that they will prove to be good hedging tools against currencies and stocks. Here are some reasons why:
Apart from these features, the fact that cryptos have been around only for a few years, in comparison to gold, which has been used as a store of value for thousands of years makes the precious metal a better option for hedging. Also, gold has a low or negative correlation with stocks and bonds, especially during periods of economic recession, making it a powerful hedge. No such correlation has been established between cryptos and other currencies or stocks so far.
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