Bitcoin has often been called ‘digital gold’. This is due to its scarcity, decentralised nature, durability, and its potential as store of value; all characteristics that are much like traditional, physical gold. Its finite supply, resistance to control by a single governing body, and role as an investment hedge against inflation mirror gold’s properties, arguably position it as a modern, digital counterpart to the traditional precious metal. Recently, both Bitcoin and gold have experienced rallies and retracement following meteoric rises in price.  Are there any similarities in recent movements for both gold and Bitcoin? Are there meaningful historical links between these potentially similar assets? Can we anticipate similar behaviour in terms of how they might be priced into the market in the future?

How Bitcoin Mirrors Gold

Regulatory Developments 

One pivotal element propelling Bitcoin’s ascent is the evolving regulatory landscape, especially in the United States. Recent developments have seen the cryptocurrency industry score key legal victories as the SEC rules in favour of Bitcoin, particularly as it pertains to the approval of the ETF. This works towards signalling a turning point in the quest for legitimacy. Among these developments, the approval of Bitcoin spot Exchange-Traded Funds (ETFs) stands out, facilitating institutional and retail investment in digital currencies. This milestone has not only broadened the investor base but has also enhanced Bitcoin’s credibility and attractiveness as an investment asset. This regulatory acceptance of Bitcoin arguably echoes several historical moments from the spot gold market, particularly when we consider regulatory acceptance and the mechanics of supply and demand. In the early 2000s, the gold market experienced a significant boost with the introduction of gold spot ETFs, most notably the SPDR Gold Shares ETF in 2004. This fund provided a direct avenue for retail and institutional investors to gain exposure to gold. Gold ETFs provided a convenient and efficient vehicle for exposure to the price movements of gold without the complexities and costs associated with buying, storing, and insuring physical gold. Before the advent of ETFs, institutions looking to invest in gold might have faced significant barriers, including storage security, insurance costs, liquidity issues, and the logistics of handling large quantities of a physical asset. 

Bitcoin Halving and Value Dynamics 

Another critical factor in Bitcoin’s recent price surge is the anticipation of the upcoming Bitcoin halving event. Halving, a feature built into Bitcoin’s protocol, reduces the reward for mining new blocks by half approximately every four years, effectively limiting the supply of new Bitcoins. This event is a significant mechanism to combat inflation and preserve the scarcity of Bitcoin, a key attribute that distinguishes it from traditional fiat currencies. The halving process has historically triggered substantial interest and speculation, as the reduced supply of new Bitcoins against a backdrop of steady or increasing demand can lead to price increases. The upcoming halving event, expected in April 2024, has already begun to stir market anticipation, contributing to the rally. Investors, drawing from past halving events which have seen substantial price jumps, are positioning themselves to capitalize on the expected reduction in new Bitcoin supply, underscoring the event’s significance in the cryptocurrency’s valuation dynamics. The Bitcoin halving is somewhat analogous to the gold discovery and mining process. Just as gold mining becomes more challenging and less fruitful over time as the easier-to-reach gold is extracted, the Bitcoin halving reduces the reward for mining new blocks, making new Bitcoins less accessible. For gold, this scarcity can drive up value when new gold deposits become harder to find or when the cost of mining increases, often due to technological or regulatory factors. In Bitcoin’s case, the built-in scarcity due to the halving is designed to increase its value by reducing the flow of new coins into the market. In the same way that Bitcoin’s mining rewards have been decreasing, so have golds. For one, the grade of ore, which represents the concentration of gold within the ore, has been decreasing, indicating that mining for gold is becoming more challenging. For example, in the 1980s, the average grade of ore was around 10 grams per tonne, but by the 2000s, it fell to around 1-2 grams per tonne in many mines. Gold production hit a peak in 2018, with 3,332 metric tons extracted. However, as new gold deposits become harder and more expensive to mine, this has an impact on supply. Despite fluctuations, gold prices have generally trended upwards from around $1,000 per ounce in 2009 to as high as over $2,000 per ounce in 2020. 

Why Gold and Bitcoin are Often Not Correlated  

 A general correlation between Bitcoin and gold might be based on certain shared characteristics, such as scarcity and potential as a store of value. As explained above, Bitcoin’s recent price movements are most likely the result of regulatory developments and an influx of investment anticipating a ‘halving event’. However, when we look at the key drivers of gold’s recent rally, we find something quite different. While gold thrives amid the weakening U.S. dollar and Federal Reserve’s hints at potential interest rate cuts, Bitcoin’s trajectory often diverges, driven more by speculative investor sentiment and technological advancements than traditional economic indicators. Gold benefits from its historical role as a safe haven and a hedge against inflation, particularly in times of geopolitical strife and central bank accumulation, factors that inherently differ from the digital currency’s appeal. Moreover, the decline in bond yields, which diminishes the opportunity cost of holding gold, does not influence Bitcoin in quite the same way, highlighting the distinct forces propelling each asset’s value. 

Considering Bitcoin’s volatility and regulatory uncertainties, drawing this analogy can be misleading and potentially risky for investors. The digital nature of Bitcoin, its dependence on technological development, and its relatively short history compared to gold’s centuries-long status as a financial safe haven introduce distinct risks and opportunities. Thus, while the analogy can highlight some aspects of Bitcoin’s value proposition, it simplifies the complex and distinct nature of these assets. 

Market Maturity 

Gold has a centuries-long history as a medium of exchange and store of value, contributing to its stability. The gold market is mature, with a vast and diverse range of participants, from central banks and institutional investors to jewellery manufacturers and individual collectors. In contrast, Bitcoin, created in 2009, is a newcomer. Its market is developing, and while it has seen rapid growth, it is still evolving and is subject to significant price swings. These fluctuations can be attributed to varying factors, including investor sentiment, technological developments, and macroeconomic trends that may not similarly affect gold. 

Regulatory Environment 

Gold is widely recognized and accepted by regulatory frameworks worldwide. It operates within a well-established system of trading, weighing, and tracking that is understood by financial institutions and governments. Bitcoin’s regulatory landscape, on the other hand, is continually shifting. Different countries have differing stances on cryptocurrencies, ranging from outright bans to enthusiastic adoption. This inconsistency can lead to increased volatility and legal uncertainties for Bitcoin holders and investors. 

Physical vs. Digital Nature 

Gold is a physical commodity with inherent value. It is used not only for investment and wealth preservation but also in industries such as electronics and jewellery. Bitcoin is entirely digital and derives its value from the network it operates on and the consensus of its users. It does not have any physical use beyond being a medium of exchange, and its value is entirely dependent on technology and the continued operation of its underlying blockchain. 

Factors Influencing Supply and Demand 

While both assets are scarce, the factors influencing their supply and demand are vastly different. Gold’s supply is influenced by mining production, which can be affected by technological advancements and environmental regulations. Its demand is driven by both investment needs and practical uses in industry and jewellery. Bitcoin’s supply, in contrast, is algorithmically fixed with a cap of 21 million coins, and its demand is primarily driven by investor interest and adoption as a means of payment. This difference means that while scarcity can impact the price of both, the way that scarcity comes about and affects the market is not the same. 

Investment Profile 

Investors view gold as a safe haven asset, especially during economic downturns, due to its long-standing value and lack of correlation with other asset classes. Bitcoin, with its high volatility, is often viewed as a speculative investment and a means to achieve substantial gains over a short period, though this view could very well change as the market matures. 

Conclusion: The Unpredictable Intersection of Bitcoin and Gold 

While the comparison of Bitcoin to ‘digital gold’ underscores some shared attributes like scarcity and a potential hedge against inflation, traders and investors should exercise caution in closely correlating the two. Indeed, certain characteristics, such as the decentralized nature, durability, and finite supply, draw parallels between Bitcoin and gold. Both assets have also mirrored each other in rallying to all-time highs and experiencing significant retracements. These resemblances, while noteworthy, can lead to an oversimplification of the nuanced differences that set them apart. Gold tends to thrive on macroeconomic instability and bond yield movements, while Bitcoin is capitalising on digital era opportunities. Although the two may appear to be moving in similar manners, it is important to distinguish between their underlying market drivers and not expect the two assets to behave in the same way in the future. 

Reference:

How much gold is there left to mine in the world? – BBC News

Decentralized Assets Like Gold and Bitcoin Are Looking More and More Attractive | USGI (usfunds.com)

Is Gold An Inflation Hedge? – Forbes Advisor

Bitcoin Halving: What It Is And What It Means For Crypto Prices? (forbes.com)

Gold Prices – 100 Year Historical Chart | MacroTrends

Zachariah Walker

Content Writer at Finalto

All opinions, news, research, analysis, prices or other information is provided as general market commentary and not as investment advice and all potential results discussed are not guaranteed to be achieved. The information may have been derived from publicly available sources, company reports, personal research, or surveys. Past performance is not indicative of future performance. Trading carries risk of capital loss. Service available to professional clients only.