Gold and Bitcoin: Friends or Foes?

There are always people in the market who regard Bitcoin as a kind of "new gold" or "digital gold".

First, let’s understand why people always like to compare Bitcoin and gold. Simply put, there are many similarities between the two.

On the supply side, Bitcoin and gold are decentralized in their mining and ownership, and unlike traditional currencies, their supply cannot be created through fiat or monetary policy. On the demand side, Bitcoin and gold also have similarities, as both assets are seen as a hedge against inflation and a store of value.

However, there are also major differences between the two assets.

On the one hand, gold is a physical asset, while Bitcoin is not; on the other hand, gold has a long history, while Bitcoin is a new thing; and most importantly, gold cannot be copied, while all the characteristics of Bitcoin can be copied as long as a similar cryptocurrency with a different name is issued.

However, HSBC said that many studies have analyzed the relationship between Bitcoin and gold, pointing out that the correlation between the two assets is almost zero.

A recent article titled “The Bitcoin Gold Correlation Puzzle1 (July 2021)” examined the evolution of gold and Bitcoin during the period 2011-2021.

During this period, the price of gold fluctuated between $1,100/ounce and $2,000/ounce, and although it rose most of the time, no long-term trend was found.

During this period, the price of Bitcoin rose from less than $100 to more than $50,000, showing a clear (albeit volatile) upward trend.

The article gives two possible explanations for the very different price trends of Bitcoin and gold.

The first reason is that the similarity between Bitcoin and gold is just a superficial statement that investors do not really accept. The second reason is that there are other factors that effectively suppress the true correlation, such as the "substitution effect" or "catch-up effect."

The so-called "substitution effect" means that investors sell gold and buy Bitcoin, and vice versa. The "catch-up effect" means that investors buy Bitcoin to catch up with the market weight and gold position.

In fact, in addition to the above-mentioned research, there are other studies that believe that the correlation between Bitcoin and gold is weak, and Bitcoin should not be used as an alternative investment to gold.

A 2019 article titled "Is Bitcoin a Better Safe Haven Investment Than Gold and Commodities?" points out that while the media and some commentary articles like to compare the advantages and attributes of Bitcoin and gold, there is no empirical evidence to support any such comparison.

The authors of the article found that gold’s value role as an investment asset cannot be ignored during times of stress, with a large body of evidence showing that gold has safe-haven properties against stocks, which is mostly not the case with Bitcoin.

In terms of global stock market indices, Bitcoin, gold and commodities have similar safe-haven properties. However, when the market is more segmented, it is different.

Gold is a proven safe-haven asset for developed market equities.

Gold and commodities are safe haven assets for emerging markets.

The author gives some reasons for the difference in risk aversion, such as financial institutions are still relatively cautious about Bitcoin. However, the key reason seems to be that most participants in the Bitcoin market are relatively young and inexperienced individual investors.

In addition, the article also warned investors not to use Bitcoin as an alternative investment to gold and commodities. In terms of history, price stability and availability, Bitcoin still has a long way to go.