Bitcoin is often cited as ‘digital gold’, and in fairness, there are some genuine similarities.
Just like physical gold, Bitcoin is ‘mined’, albeit with powerful computers solving complex equations instead of picks, shovels and excavators.
Just like physical gold, Bitcoin has a finite supply, thus its value is derived from its scarcity.
And just like physical gold, bitcoin’s price is currently on a rip.
Just as gold reached an all-time high on Monday, bitcoin shot above $41,000 for the first time in 20 months.
But, though it is enticing to draw similarities between them, investors should be wary of drawing a strong correlation between gold of the digital and physical varieties.
Safe havens versus high-risk
“Although BTC is often referred to as digital gold, the historical correlation between these assets has consistently been low,” explained Matteo Greco at Fineqia International Inc (CSE:FNQ, OTC:FNQQF).
Whereas “gold serves as a safe haven… BTC is highly volatile and perceived as a high-risk asset”, he contended.
This played out when central banks across the UK, Europe and US commenced their fiscal tightening programmes last year to reign in spiralling inflation.
Bitcoin and cryptocurrency prices in general marched lower, while gold remained comparatively strong, if somewhat volatile.
This proved gold’s status as “sound money” in times of economic uncertainty, stated Malcolm Palle, chief executive of Coinsilium Group Ltd (AQSE:COIN, OTCQB:CINGF). “Gold’s credentials in this respect are undeniable, and it has performed this function impeccably for thousands of years.”
Basically, if bitcoin truly was analogous to digital gold, it would have provided a similar safe-haven status; this didn’t happen.
Said Greco: “If we consider the preservation of purchasing power as the primary function of a store of value, gold has demonstrated its superiority, especially during the challenging times of 2022.
“BTC is still perceived as a risk-on asset and serves more as a long-term store of value rather than a hedge for specific moments of macroeconomic tensions.”
However, Greco contended that “despite their distinct characteristics and functionalities, I am optimistic that BTC's role as a pure store of value will grow over time due to its unique features and the ongoing development of the world”.
But why the spectacular return to form for bitcoin in 2023?
Bitcoin ETFs and gold’s hegemony
By now, any observer of the bitcoin markets will tell you that the pending admission of spot-bitcoin exchange-traded funds to the New York stock markets has sent traders into a frenzy of hype and speculation.
Other technical reasons such as the bitcoin ‘halving’ event in April 2024, which will effectively double bitcoin’s future scarcity, have also supported a bullish thesis for the world’s largest cryptocurrency.
Bitcoin’s asset profile may also be maturing, as broader adoption and younger, more crypto-friendly investors start to build their portfolios.
Nevertheless, “BTC is still viewed as a high-risk asset, and the factors driving its price increase fundamentally differ from those influencing gold”, said Palle, adding: “Gold is also currently far more accessible than Bitcoin for most investors, with a broad range of products available from ETFs to coins/bullion and jewellery.”
Therefore, it stands to reason that as more and more investment vehicles dealing in bitcoin come to market, gold’s status as the true safe-haven asset will be increasingly challenged, even if gold has multiple thousands of years of first-mover advantage.
“The current value of the global gold market is around $14 trillion whereas the market cap of Bitcoin stands at around $820 billion – so the Bitcoin market is currently around 5% the size of the gold market,” noted Palle. “For Bitcoin to reach its full potential as a true investment alternative to gold, it will have to make up a lot of that ground.”
So yes, both bitcoin and gold are on a rip, though for starkly different reasons.