Can Bitcoin Behave Like Gold?

One year ago, when consumer prices were climbing faster than they had since 1982 and the economy was looking shaky, the concern was that the dollars people had saved would be drained of their purchasing power. It was the time to rekindle relationships with safe haven assets that can be relied on to hold steady values in rough times.

Believers in bitcoin were expecting their asset to find its time in the sun, but it didn’t. On the contrary, its value had been halved since November 2021, when it stood at $69,000. “Bitcoin is still early in its maturity curve to be firmly placed in the category of ‘digital gold’”, pronounced Luno’s Vijay Ayyar.

Gold, however, was performing a lot better, in line with its historical reputation. Unlike bitcoin, gold is tangible, mainstream, and accessible to a wide variety of economic classes aiming to invest. Central banks around the world also fall back on the metal when it’s time to restore financial stability.

Things grew complicated in the first week of October 2022, though, when both Bitcoin and gold saw gains of 3% and the 30-day correlation between the two assets rose to its highest in a year. Perhaps Bitcoin was breaking away from its risk asset peers and rekindling its relationship with gold. “We could be seeing a slight decoupling of crypto and equity markets, which is reflected in bitcoin’s rising correlation with gold”, suggested Clara Medalie of Kaiko.

How should gold be weighed against Bitcoin as a hedge against economic uncertainty? Join us now as we explore the question.

Volatility

Bitcoin is famously susceptible to the influence of both the mainstream media and social media. Regulatory crackdowns on cryptos tend to depress their prices, and social media posts by celebrities have proven their power to launch them to sudden, new heights. Traders relate to bitcoin with impulsive and extreme decision-making, and we see this in panic-selling or hype-driven buying sprees.

Gold, by contrast, does not live and die by the news items we see. Rather, its value is based on an old and established market, and people don’t seem to go through phases of losing faith in its power to preserve value.

Liquidity

If you own gold and want to sell it, you’ll probably find you can accomplish this quite briskly, which makes it a very liquid asset. Depending on your personal priorities, this might be an important quality to look for when you’re planning to invest.

If, however, you need to sell 600 Bitcoins ASAP, it might take longer than you hoped. For instance, as of last year, the crypto exchange Coinbase only allowed clients to cash in digital currency to the value of $50,000 in one day. If the value of one Bitcoin exceeded this amount, you’d only be able to liquidate a single one in increments.

Environmental Impact

Bitcoin mining has been widely criticized for eating up huge portions of energy and compromising green-living priorities. When Tesla CEO Elon Musk cited this as the reason his company would reject bitcoin payments, coin prices slid. Gold mining, to tell the truth, is not environmentally innocuous either. It has been known to adversely affect biodiversity and pollute water with toxins. Mining operation have even been lambasted for neglecting human rights.

Usability

Gold is used in the jewelry industry, but also in dental surgery and the manufacture of electronic devices. Its versatile usability has contributed to keeping the metal’s price steady over the years. Bitcoin can be used to pay for things, but this use has yet to grow common. Its main use at the moment is as a speculative trading instrument, which has helped some people grow rich, on the one hand, but which has led on others to lose their savings, on the other. DeFi (decentralized finance) represents the prospect of a different use-case for crypto as the vehicle for an internet-based financial world where the strings are all in your own hands, as opposed to the bank’s, but this has yet to materialize.

Wrapping Up

In spite of these differences, it remains true that both gold and bitcoin offer you the opportunity to diversify the portfolio in which you invest, and that both have a fixed quantity in the world. The amount of gold sitting in the earth’s crust is not unlimited, and there will never be more than 21 million Bitcoins.

As to acting as an inflation hedge, it should be noted that the renewed correlation between bitcoin and gold last October was not very strong, but only somewhat positive. According to Charlie Morris of ByteTree Asset Management, the correlation will decrease or turn negative by the middle of this year.

Clara Medalie, for her part, says it’s still “too early to tell” if this correlation will persist or not.