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Gold vs Bitcoin: another look in the current macro climate

Perhaps some will remember that digital currency investing firm, Grayscale Investments, launched an initiative called “Drop Gold” back in 2019. The aim of the campaign was to encourage investors to divest their gold investments in favour of investing in cryptocurrency or crypto-based products, such as the Grayscale Bitcoin Trust (GBTC).

However, few will remember that, at the time, Grayscale themselves also dismissed any direct comparison between gold and Bitcoin despite both being scarce, decentralised assets. This is due to what they considered to be Bitcoin's superior composition of "good money’ qualities made for a digital global economy."

Since then, we all know that "digital gold" narratives have proved enduring and recently highlighted again by BlackRock CEO Larry Fink, whose remarks likening Bitcoin to digital gold intended to build momentum behind the since-failed Blackrock spot #ETF application.

But do the direct comparisons actually make sense, particularly in the current macro climate?

The current macro context

Since 2022, unfavourable market conditions have produced a much more challenging environment for investors to generate returns. The worst annualised performance of the S&P500 in over a decade (-18.1%) reflects what was a dismal performance in equities. Despite a rally in 2023, global stock markets are poised for an additional correction as a consequence of the expected economic slowdown in Q4 fuelled by a drop in central bank liquidity and coupled with disinflation.

Figure 1: Historical P/E ratios measured by the number of standard deviations above/below average

As can be seen from the chart above, The current S&P500 10-year P/E Ratio is 28.9. This is 43.4% above the modern-era market average of 20.2, putting the current P/E 1.1 standard deviations above this level. This suggests that the market is overvalued.

Moreover, the outlook for the debt market remains uncertain. While current respective yields of 5.00% and 3.88% for 2-year and 10-year treasures are attractive and undercutting stocks in the current climate (see Figure 2), there is evidence that the bond market is reflecting a future decline in the US dollar, with any asset priced in dollars worth less to foreign holders. This trend is partially reflected by major BRICS economies dumping some $123 Billion in US Treasuries in 2023 as the federal government's spending once again exceeds its revenues.

Figure 2: Treasury yields undercutting stocks' earnings for the first time in over two decades

Source: David Ingles, Bloomberg

Gold vs. Bitcoin: who wins the inflation hedge and returns battle?

Though these are the very macro environments where gold s expected to shine, its reputation as an inflation has taken a drubbing recently. With a full-year 2022 return of 4.2% and a YTD of -0.3% YTD (as of October 5), the yellow metal has been underperforming the CPI. Part of this is that gold has historically also been negatively correlated to real rates (i.e. gold provides no yield so the opportunity cost of holding it rises as yields rise) and inflation alone is not the sole driver. Indeed, comparative analysis between periods of high inflation vs. low inflation suggests that it is a poor predictor of the gold price.

For Bitcoin, its +66% move year-to-date has been the strongest performing asset in 2023, and significantly eclipsing gold. But seen in the context of the sharp 66% decline during the peak of the bear market in 2022, Bitcoin's two-year performance isn't markedly better.

Figure 3: Total returns by asset class since 2011 - 2023 (cumulative & annualised)

However, it is when zooming out and looking at the data from a longer-term horizon that the returns differences are laid bare. While Bitcoin has been the best-performing asset in 10 out of the last 13 years, with a cumulative return of 8,527,743% (145.1% annualised), gold has returned 29.8% (2.1% annualised) over the same period, as per the chart above. This suggests that while gold does indeed act as a dependable store of value (with a 5,000 track record to back it up) and a hedge against systemic risk such as banking sector failures, Bitcoin's price action means it acts much more as a multiplier of value over time.

Bitcoin and gold's incidental correlation

The total returns data underlines the futility of direct comparisons of what are two fundamentally distinct asset classes – a fact that is further supported by correlation data. For example, data from CFA Institute from November 2022 investigating cryptocurrencies' correlation with commodities shows that between October 2019 to October 2022, gold's correlation coefficient with Bitcoin was only 0.15. Moreover, silver more closely correlated with Bitcoin at a 0.26 clip, as shown in the chart below.

Figure 4: Cryptocurrency and commodities correlation heat map

Source: CFA Institute

Ultimately, the above data reveals that the differences in behavioural characteristics and performance dynamics means that direct comparisons between Bitcoin and gold add little value. It's also important to note that the strengthening dollar has resulted in most major asset classes (gold, crypto, stocks, and bonds) selling off in tandem, resulting in a largely incidental Bitcoin-gold correlation as they have continued to oscillate around key support zones.

What really makes Bitcoin digital gold

What makes Bitcoin a true store of value is that hardwired into its protocol DNA are elements that ensure its stability of supply over time: Bitcoin is released approximately every ten minutes via block rewards paid to miners. This block reward halves every 210,000 blocks until the amount of Bitcoin in circulation reaches 21 million. This fixed total supply is hard-coded into the protocol and cannot be changed.

What’s even more interesting is that these mechanisms are capital-intensive and energy-intensive, like gold mining, and, sure enough, it is even modelled after it. Quoting directly from the white paper:

"The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation."

The bottom line is that much of Bitcoin's “store of value” discussions exist mostly as narratives within TradFi. This means that it is seen through the lens of a globally traded speculative asset, not the distributed, 'peer-to-peer electronic cash system' it was originally designed to be post global financial crisis.


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Disclaimer: The information contained within is for educational and informational purposes ONLY. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision. No commercial relationships or partnerships exist with any of the technology providers, manufacturers, or suppliers herein.

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