The Fed’s unprecedented money printing has led to staggering levels of inflation. In this kind of environment, investors are seeking hard assets and places to store their wealth.
Years ago, the logical store of value was gold. But, these days, gold is getting some serious competition from Bitcoin–the crypto currency that aims to be a “new kind a gold” for a new generation.
But, is bitcoin really like gold?
The Need For An Inflation Hedge
After the shocking October inflation data, investors were scrambling for an inflation hedge. At the same time, gold was underperforming. While the October inflation rate was over 6%, gold had actually dropped 2%. In fact, gold has fallen this year, from $1887 to $1789 where it is now.
Many mainstream investors started looking for alternatives and increasingly, many look at bitcoin. Due to its limited supply, some investors see it as a potential store of value.
Even former U.S. Treasury Secretary Larry Summers has said he thinks Bitcoin could become a kind of “digital gold.”
Institutional Money Flocking to Bitcoin
Meanwhile, Bitcoin has another plus side. It has been the best performing asset in the past few years, growing faster than commodities and stocks. Part of its growth may stem from the sudden interest from institutional investors. After all, just prior to the October inflation report, bitcoin had shot up to the all-time high of $68,600. Just ahead of that Bitcoin rally, JPMorgan doubled down on its $146,000 price prediction for Bitcoin. The prediction primarily centers on the idea that investors will replacing gold with Bitcoin in their portfolios./
“Bitcoin’s allure as an inflation hedge has perhaps been strengthened by the failure of gold to respond in recent weeks to heightened concerns over inflation,” the report wrote.
Analysts from Goldman Sachs were bullish as well. Damian Courvalin, Head of Energy Research at Goldman Sachs said that gold is becoming a poor man’s crypto. More and more people are starting to use crypto as an alternative to gold, he explained.
“Just like we argue that silver is the poor man’s gold, gold is maybe becoming the poor man’s crypto,” he said.
But, in investing, not all is as it seems. And one of the troubles with the idea that bitcoin could be a hedge against inflation is that it needs to be considered a ‘store of value.’ But, how can something be a store of value when it’s so volatile?
In recent weeks, bitcoin has plunged over 20%, to $56,000 making bitcoin an increasingly too risky asset. The drop shocked institutional investors and made them reassess their position on “digital gold.”
But it really shouldn’t have. As Mark Yusko, CEO of Morgan Creek said, Bitcoin’s volatility is well-known–and, he still thinks Bitcoin is in for a post Thanksgiving surge and going to $250,000 pretty soon.
Bitcoin’s Cyclical Volatility
Why? Well, the key to understanding that is in Bitcoin’s four-year cycles. These contribute both to its volatility and its huge price increases.
In order to understand the cycles, it’s critical to understand how bitcoins are created. The amount of Bitcoin available, is not static. The Bitcoin blockchain, the code behind the crypto, creates fresh Bitcoins at a steady pace.
This pace is critical to the price of the asset. As gold investors know, gold is valuable because it is scarce. Although new gold is mined every day, it is mined at a very slow pace. The amount of gold per person has changed only marginally in the last century.
Compare and contrast the creation of gold or bitcoin to dollars: The Fed prints U.S. dollars at an alarmingly fast pace – so much so that the dollar has lost 96% of its purchasing power since 1913.
Bitcoin ‘Halving Cycles’
Approximately every four years, Bitcoin’s blockchain halves the speed by which it creates new tokens. This period is therefore called a halving cycle.
Why is that important? Because that means that the speed at which Bitcoin’s supply grows is slowing exponentially.
This also means that Bitcoin’s price could go up exponentially. If Bitcoin’s supply is charted on the stock-to-flow model, the results are startling. Note that the values on the X-axis are not linear.
So far, the model has been pretty accurate at predicting the price of Bitcoin. And if that continues, Bitcoin could go up as high as $1 million per coin by 2026.
There is one important caveat. The model presumes that there will be demand for Bitcoin at any price. Scarcity alone would drive the price, in that case.
Bitcoin bulls understand that the asset will have to stop growing at some point. However, they are still confident it will grow by a lot.
“The $250,000 number… that is gold equivalence, the monetary value of gold equivalence,” Yusko said. “Bitcoin will easily get to that gold equivalence, he added.
Michael Saylor, the CEO of Microstrategy predicts that Bitcoin could increase 100-fold.
“It’s pretty clear that bitcoin is winning, gold is losing and it’s going to continue. It’s pretty clear digital gold is going to replace gold this decade,” he said.
“At the end of the decade, it will have flipped gold, and then it will flip monetary indexes. A little bit of bonds, a little bit of real estate, a little bit of equity, and emerge as a $100 trillion asset class. So, 100 times more than it is now,” Saylor said.
But, the model may not be perfect…
For example, the model has Bitcoin at $98,000 by the end of November 2021 — now. It predicts bitcoin at $130,000 by the end of the year. Bitcoin is currently at $59,000.
Bitcoin critics point out, that they’re not surprised by this slowdown. That’s because bitcoin suddenly has a lot of competition – and not just gold.
Other cryptos — which are being created almost daily.
In fact, other cryptos, all promising to be the ‘new’ bitcoin, are eating at the demand for BTC. Specifically, Bitcoin dominance, a measure of Bitcoin’s market cap relative to all coins, has dropped below 42%. Some analysts predict that it could soon drop below 40%, an all-time low.
At the same time, altcoins have been rising. Some of them have much better fundamentals – namely, use cases – than Bitcoin.
For example, Ethereum, with its own smart contract ecosystem. It reached 19.5% of dominance, up from 18% a few months ago. Other coins like Solana, a scalable version of Ethereum, are growing rapidly.
The Case For Gold
It is clear that Bitcoin is a much more speculative bet than many have predicted. At this point, it is not clear that it can be called “digital gold.”
Bitcoin could be replaced by another crypto, be it Ethereum, Solana or some coin that doesn’t even exist yet.
Meanwhile, it is very hard to argue that gold will ever be replaced. The demand for gold will, for the foreseeable future, be there just as it has for thousands of years.
This is why George Milling-Stanley, the chief gold strategist at State Street’s SPDR ETFs, thinks that gold and crypto can coexist.
“The reason why people are buying bitcoin and cryptocurrencies at the moment is highly speculative. That’s a complete risk-on situation,” he told CNBC.
“It’s less defensive in my mind. The reason why people are buying gold at this point is much more defensive” he went on.
At this point, Bitcoin is all about risk and high returns. Gold is about “the long-term preservation of capital or purchasing power.”
That is why many suggest that shrewd traders should have both some crypto and some gold.
In fact, a European asset management company Incrementum says that gold and crypto complement each other well.
Specifically, gold and crypto have a very low correlation and a significant difference in volatility. In other words, gold is a great diversifier for crypto investors and vice versa.