In the wake of Donald Trump’s re-election, the crypto market has surged to unprecedented levels, with bitcoin surpassing its record high. The asset reached R1,693,693 on Luno last week. This rally has renewed interest in how cryptocurrencies, particularly bitcoin (sometimes called digital gold), compare to real gold, which has had an extended good run.
Gold has long been considered the ultimate store of value, especially during economic uncertainty. It has been a go-to hedge against inflation, currency devaluation and geopolitical turmoil. For hundreds of years, gold has preserved wealth during crises.
Bitcoin is also scarce, with only 21-million to be mined. It has introduced a digital alternative regarded as a modern hedge against economic instability.
Bitcoin shares several characteristics with its physical counterpart. Both are decentralised and scarce while gold’s supply is also naturally limited. Both are resistant to inflation, appealing to those wanting to protect their portfolios from a depreciating fiat currency.
But the correlation between bitcoin and gold is inconsistent. During financial turbulence, as with the initial phase of the pandemic in 2020, both assets experienced a simultaneous rise, suggesting that investors viewed them as safe havens. However, during the 2022 market downturn, fuelled by crypto industry headwinds and rising interest rates, bitcoin experienced significant volatility, while gold remained relatively stable.
Gold and bitcoin are influenced by inflation expectations, interest rates and geopolitical tensions, and their performance is tied to traditional economic indicators.
Gold has a centuries-old track record and showcases significantly less volatility. Bitcoin also becomes attractive in economic downturns, but its high volatility may influence the decision to invest in it. Technological advancements, regulatory developments and adoption also drive bitcoin.
While the whole of 2024 could be viewed as a rally period, the recent rally in bitcoin, thanks to Trump’s pro-crypto stance, shows how political and regulatory shifts affect crypto prices. The promise of lighter regulation has encouraged institutional investors, further boosting bitcoin’s price.
There has been a surge in institutional interest in bitcoin. The approval of the spot bitcoin exchange traded funds in the US signalled institutional trust and prompted significant capital inflows. Companies such as MicroStrategy and Tesla added it to their balance sheets. MicroStrategy’s bitcoin holding is valued at almost $25bn. Institutional backing and increasing regulation have added credibility to bitcoin, proving it to be a legitimate investment vehicle rather than just a speculative asset.
Many large hedge funds and some conventional asset managers have cited the finite supply of bitcoin as the reason they adopted it as a core hedge against inflation. This is in contrast to the ability of central banks to print more fiat currency infinitely.
Gold’s market is already mature, with limited upside potential. Though gold remains a stable store of value, it doesn’t have the growth and volatility that drive bitcoin’s appeal. While gold may serve as a stable hedge, bitcoin’s value is tied to its future as a disruptive technology and asset class.
Are bitcoin and gold in competition, or can they coexist as complementary assets? For risk-averse investors, gold offers a stable way to guard against economic uncertainty, while bitcoin presents a higher-risk, higher-reward opportunity, particularly for those with a longer-term outlook.
Though there is some overlap between the drivers of gold and bitcoin, their correlation is irrelevant, underscoring their distinct roles in an investment portfolio. Bitcoin’s status as digital gold may evolve, but it is unlikely to replace physical gold as a safe haven asset. Instead, investors may benefit from holding both assets to hedge against economic uncertainty in a well-balanced investment portfolio.
The gold vs bitcoin debate remains one of diversification rather than substitution.
*De Wit is the country manager for Luno
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