The relationship between Bitcoin and Gold is as complicated as they get. While there are similarities between the two assets, with the former also going by the nickname of ‘Digital Gold’, critics have pointed out that the correlations are not always as concrete as they might seem.
Bitcoin’s rise to $20k came days after JPMorgan pointed out, in their global markets strategy note published in early December, that a substantial amount of money has flowed out of gold and into Bitcoin since October. The firm also predicts that this could be the start of a trend of increased inflows into Bitcoin – at least, over the medium- to long-term.
Many have argued that Bitcoin is as much of a ‘safe-haven’ as the yellow metal during turbulent times, and what better case-study to analyse this than the year 2020?
What do Bitcoin and Gold have in common?
In a year marked by a deadly coronavirus pandemic, a major US election, political instability across the globe and the possibility of a no-deal Brexit, investors have sought after safe-haven assets, pushing Bitcoin and Gold to new heights.
In fact, 2020 saw both Bitcoin and Gold reach a new all-time high. In July, Gold soared past its last all-time high of $1,891.90 per ounce, set in August 2011. On December 16th, BTC broke past the $20,000 mark, exceeding its previous high last recorded in 2017.
Both bull-runs seem to have been caused by the uncertainty that tainted Forex and stock markets throughout the year, elevating the status of Gold and BTC as a safe haven for investors. However, once the demand for an asset grows, a plateau is eventually reached due to expanding supply. This means that the higher gold prices lead to rising supply, as miners can afford to mine lower-grade ore that would otherwise be too costly to produce. Consequently, the increase in supply leads to lessening demand for the asset.
A Striking Difference
A key advantage that Bitcoin holds over Gold is that the demand for the asset is not linked to supply. Since there’s a hard ceiling on the supply of Bitcoin, determined by the blockchain, the popular crypto’s supply cap is limited to approximately 21 million BTC. This makes Bitcoin a ‘deflationary’ currency, which also happens to be one of its major selling points.
When increasing demand meets fixed supply, the markets tend to go wild. This may also be the reason behind the highly volatile nature of cryptocurrencies. Although each coin tends to behave differently, there is a pattern to be traced in the sharp price increases and crashes that many cryptocurrencies have experienced throughout their lifetime.
Even though cryptocurrencies such as Bitcoin are prone to volatility, with every price crash, the valuation has never fallen to levels lower than previously recorded. Rather, lower prices, along with much media fanfare, leads to new players entering the crypto sphere and an ever-growing industry!