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Bitcoin and Gold in This Crisis: Similarities and Differences

October 30, 2020

As much as a hippo says it’s an ostrich, sooner or later you have to be honest. The mirror doesn’t lie. And identity cannot always be established by decree. The evidence tells us that we are facing something and pretending otherwise is just a delusion. We can walk down the street dressed as Superman, but that doesn’t make us Superman.

Now let’s put the crypto community on the couch to solve an identity crisis. Why do so many bitcoiners insist on the idea that bitcoin looks like gold? This Freudian mess deserves a thesis. Bitcoin is new, volatile, and futuristic. Gold is talkative, stable, and boring. Bitcoin is an asset that attracts young people. Gold is an asset chosen by the most conservative governments, banks and funds. Bitcoin is risk and optimism. Gold is security and fear. However, many say that Bitcoin (a tiger) is like gold (a turtle).

To any investor, a comparison between these two very different assets may seem absurd. However, In the crypto community, this is almost a sacred truth. Anyone who dares to suggest that Bitcoin and gold are not correlated risks being burned in public space for heresy. In the bitcoin community, bitcoin and gold are correlated with yes or yes. It’s a matter of dogma.

Bitcoin and Gold in This Crisis: Similarities and Differences
Bitcoin and Gold in This Crisis: Similarities and Differences

Read on: Gold “sinks” against Bitcoin is very optimistic about the cryptocurrency, says Raoul Pal

Gold beetles also find this comparison absurd. Obviously, this illusion does not come from them. This quasi-religious creed comes from some areas of the crypto community. With the kind permission of the libertarian economic ideology. According to legend, the whole world longs for the introduction of a hard currency. We are referring to the tragedy of the dollar. Fiat currencies like the dollar are depreciating as central banks print money until they can no longer do it. In an economic crisis, the population will therefore seek a safe haven in a scarce resource. Bitcoin and gold as scarce assets are correlated. This means that the behavior of both markets is very similar.

That sounds nice. However, it would be very interesting to subject this theory to the scientific method. I mean what does the evidence tell us? The data is visible to everyone. And this theory could easily be verified. Compare the two graphs from the history of the last 10 years. Opinion polls could also be conducted. What do investors think? Surveys could be conducted by fund managers. Under what conditions do they buy gold? And under what conditions do they buy Bitcoin? What criteria do you use to locate both assets within an investment portfolio?

Many funds hold 5% gold (and / or oil) in their portfolios to hedge against downturns due to the negative correlation between gold and oil. A bear cycle is not about losing money. Many portfolios have a high proportion of fixed income assets (bonds). These assets do not offer high returns, but they do not lose value in a downturn. Stocks, on the other hand, offer higher returns but higher risk. So it is possible to protect yourself from stock declines by buying gold, which is a very stable asset and tends to rise in bear cycles.

How do we know gold has this behavior in times of crisis? Thanks to the historical data of the past 100 years and more. Also because gold is an integral part of central banks’ monetary policy. During a crisis, the value of the currency usually rises and a deflationary picture emerges in the economy. Central banks generally buy gold in order to weaken the currency, thereby increasing demand and boosting employment. The gold price rises.