When we look back at the trajectory that led to the rise of gold and Bitcoin, we can see that 2020 was packed full of massive financial events. All of them stemming from the unprecedented economic disruption following the coronavirus pandemic. At its peak in March, the stock market crashed, with Dow Jones falling by 6,400 points.
Heightened Federal Reserve Interventions Boost Gold and Bitcoin
Thanks to the Federal Reserve’s massive financial injections, the market soon rallied. However, these injections also introduced great uncertainty. Never before has the money supply been increased so much in such a short time. Some estimate that 35% of all dollars ever created were “printed” in 2020, as you can see from the Federal Reserve’s balance sheet.
Source: TradingView
As a result, haven assets rose against this uncertainty, safeguarding against inflation. Both physical and digital stores of value benefited greatly — gold and Bitcoin — as deflationary assets. With the new $900-billion bipartisan stimulus deal set into motion, gold’s year-to-date (YTD) price rallied by nearly 30%. At the same time, Bitcoin (BTC) achieved an all-time-high, following May’s third halving. Breaking through multiple price resistances, Bitcoin’s value more than doubled!
Source: CoinMarketCap
Consequently, Bitcoin left gold in the dust, in terms of return on investment (RoI), as you can see from this Bitcoin vs. gold chart:
At a glance, one would think all of this means that the Bitcoin perspective is a clear favourite over gold. However, to make that determination, we have to delve a bit deeper and explore other factors given the overview of all cryptocurrencies.
What Do Top Financial Institutions Say About Bitcoin’s Prospects?
Making a U-turn from Jamie Dimon’s statement in 2017 when he called Bitcoin a fraud “worse than tulip bulbs”, the J.P. Morgan Chase analysts are now forecasting Bitcoin to usurp the position of gold as a traditional haven asset. The banking powerhouse adopted a position that Bitcoin is capturing more institutional investments:
“The adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced,”
Chase’s strategists led by Nikolaos Panigirtzoglou made further projections:
“If this medium to longer term thesis proves right, the price of gold would suffer from a structural flow headwind over the coming years,”
MicroStrategy’s recent $650-million heavy investment in Bitcoin certainly demonstrated how wildly profitable Bitcoin could be, courtesy of Ellie Frost:
“If Bitcoin hits $22K...
MicroStrategy could pay the entire 5-year interest on the $650M notes
They’d *still* have profit of +$75M”
Such massive profits in such a short time is unthinkable in the gold market, which leads us to the conclusion that gold and Bitcoin are much more divergent and cater to different demographic groups.
Can Gold Capture and Retain the Interest of Younger Generations?
While both Bitcoin and gold are deflationary assets, with a finite pool of coins/extractable metal, Bitcoin has become synonymous with the money of the Internet. Something that doesn’t need to be held in hand to have value. It’s very virtual nature, making it void the costs associated with securing, mining, and transporting gold, pushes the cryptocurrency’s momentum further.
Nonetheless, Bitcoin may be overbought, relying on increasing institutional investments to push its price. At the same time, its ongoing bull run may fuel an indefinite cycle, at least in the next few years. We are seeing this in action, as one institutional investor, Michael Taylor of MicroStrategy, spurs another, Elon Musk, into action:
“Are such large transactions even possible?”
Source: Overbit’s trading survey
On top of that, in the digital era, social media continues to boost and fortify Bitcoin’s positioning as digital gold. According to Overbit’s cryptocurrency trading survey, 55% of traders are influenced by social media. This finding aligns with the Fidelity Investments report stating that Bitcoin interest is largely driven by social networking platforms. More importantly, the report clears the notion that it is correlated with other assets.
“Bitcoin’s correlation to other assets from January 2015 to September 2020 (displayed in the table below) is an average of 0.11, indicating there is almost no relationship between the returns of bitcoin and other assets.”
In other words, Bitcoin resides in its own domain, gaining more ground across institutional and retail investors, as the hodler trend demonstrates. Therefore, in the mid to long-term range, it is difficult to recommend gold over Bitcoin, if the regulatory environment stays the same.
Although it is effectively impossible to ban Bitcoin, unless the entire Internet is banned, governmental pressure can come down in the form of CBDCs. Furthermore, regulations could cripple Bitcoin price by regulating its capacity to be sold or bought for sovereign currency.
Such moves could come easily, as we have seen from the recently attempted crackdown by the outgoing Treasury Secretary Steven Mnuchin. Therefore, if you keep a close eye on regulatory happenings, Bitcoin doesn’t only leave gold in the dust as a better investment option, but also the stock market as well, with its high dependency on the Federal Reserve’s infusion of cash.
Bibliography:
- Choros, J. (2020, December 16). 35% of All U.S. Dollars in Existence Have Been Printed in the Last 10 Months. Netcoins. https://netcoins.ca/blog/35-of-all-u-s-dollars-in-existence-have-been-printed-last-in-10-months/
- Henry, D. (2017, September 13). Bitcoin is a “fraud worse than tulip bulbs” says JPMorgan CEO Jamie Dimon. The Independent. https://www.independent.co.uk/news/business/news/bitcoin-fraud-tulip-bulbs-jpmorgan-ceo-jamie-dimon-bank-investor-crypto-currency-a7943986.html
- Spence, E. (2020, December 9). JPMorgan Says Gold Will Suffer for Years Because of Bitcoin. Bloomberg. https://www.bloomberg.com/news/articles/2020-12-09/jpmorgan-says-gold-will-suffer-for-years-because-of-bitcoin
- Frost, E. (2020, December 17). If Bitcoin hits $22K... Twitter. https://twitter.com/BlockBytch_/status/1339346043897602049
- Musk, E. (2020, December 20). Are such large transactions even possible? Twitter. https://twitter.com/elonmusk/status/1340678358456274948
- Bhutoria, R. (2020, October 12). Bitcoin Investment Thesis: Bitcoin as an alternative investment. Fidelity Digital Assets. https://www.fidelitydigitalassets.com/articles/bitcoin-as-alternative-investment
- Mohsin, S., & Bain, B. (2020, December 19). Treasury Proposes Crackdown on Virtual-Currency Transfers. Bloomberg. https://www.bloomberg.com/news/articles/2020-12-18/treasury-proposes-cracking-down-on-virtual-currency-transfers