Is Bitcoin following the GOLDen Trend?
With the pandemic passing and bitcoin leading with its meteoric rise, it has left investors in a dilemmatic choice over other asset class commodities like gold. The recent pandemic has served as cryptocurrencies, first and foremost reaction to the global recession and it is on a tremendous surge, on the other hand, we all know that Gold has been the front leading performer in situations like a financial recession. Though Bitcoin and Gold have moved in tandem with each other, bitcoin has gained 144% this year over Gold which gave about 22% returns to its investors contrasting the S&P 500(index measuring the stock performance of 500 large companies listed on stock exchanges in the US) which fell 34% by 23rd of March 2020.
Cryptocurrencies have had a glitzy run in recent months. But is all that glitters really gold?
As we could witness technological advancements every day and millennials are the paramount part of the world economy, we should contemplate Bitcoin to take an increasingly influential role in financial markets as safe heaven alongside gold.
The above chart conveys that bitcoin has more correlation with gold than it does with the S&P 500.
From the chart, we are able to interpret that the correlation coefficient of Bitcoin and gold is 0.38 compared to 0.26 for Bitcoin and the S&P 500. Gold and bitcoin have both been identified as safe-haven assets. While gold has long been identified in this way, bitcoin has more recently become something that investors flock to in times of distress. For more information on the graph, you can visit coinindex.
Bitcoin has already gained nearly 160% year to date from the December 31 close of $7,196. Earlier, the currency had scaled a record high of $19,870 on December 17, 2017. In rupee terms, it has soared 168% in 2020 to trade at Rs 13,76,304.
Though Bitcoin has been uncertain with its price hikes in the past, Indian cryptocurrency watchers believe the ongoing rally is more sustainable compared with the previous ones. Sathvik Vishwanath, CEO of Unocoin, said: “That time (2017), the price increase was related more to the fear of missing out (Fomo) among investors. But this time, there are more genuine reasons for the price increase, like US hedge funds adding crypto assets to their balance sheets, PayPal allowing access to millions of its customers to buy and sell cryptos, and DBS Bank drawing up plans to provide trading services in crypto to its clients. It looks like the growth we are seeing now is more sustainable and the global recession and pandemic are fuelling it.”
Above charts have been following a correlation between each other in this pandemic, both coming to the rescue of the investors in this pandemic.
The similarity between gold and bitcoin is not only limited till here but it also extends in the process of minting both the assets. Bitcoin's structure limits its supply and makes mining more difficult with time like that of gold. Gold's supply has increased factually at about 2% each year, similar to the projected 2% increase for Bitcoin, beginning with the current 2020 halving. After the 2024 halving, the rise for Bitcoin will reduce to less than 1%. Halving divides Bitcoin's inflation rate and the rate at which new ones enter circulation into two. That increases the mining costs, not different from how the prices to mine gold are ever-increasing. The homogeneity between Bitcoin and Gold have been overwhelming, does this indicate both will continue to tag along with hereafter?
In the pool of correlation there lies some drops of contradiction.
Gold prices took a 5% hit on Nov. 9, the day of the announcement that preliminary data showed a 90% efficacy rate for Pfizer’s COVID-19 vaccine. Bitcoin immediately jumped 2% on the news. Each subsequent week has started with even more encouraging results from other vaccine trials, and the trends show falling gold and rising bitcoin.
The flip side of crypto coin has been its uncertainty and volatility of its price.
Bitcoin’s overall performance has been great in the past few years, but its value has risen or fallen by at least 72% in each of the past five years, including a 72.6% drop in 2018. On the other hand, the worst year for gold prices in the past five years was 2018, when prices dropped just 0.9% on the year.
Gold and Bitcoin have been two of the very few positivities of Covid-19, and both the commodities have been on a gold rush this year. Intellectuals even have come up with a term called ‘digital gold currency’ which is a type of crypto stablecoin where each token is backed with physical gold. With the token price pegged to the current gold price, there is less price volatility compared to Bitcoin or other altcoins. Examples of some Gold-backed cryptocurrencies are Anthem Gold, Aurus, BlockNote, etc. You could click here for comprehensive information on Digital Gold Currency.
Gold has been a historically well performer in the economic recession but Bitcoin is also on the way to join the list of ‘Safe heaven investments’, both giving some relief to the investors in the debacle of stock markets.