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Strategists Say Stop Comparing Gold and Bitcoin

Gold and Bitcoin
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EDITOR NOTE: This article misses one critical point. Referring to bitcoin as digital gold is not a comparison, much less an “exaggerated comparison.” It’s not a simile. It’s a metaphor. If someone calls me a bull or a bear, a biological comparison between bulls, bears, and humans is unnecessary because people get it. When it comes to bitcoin as a form of digital gold, most mainstream investors don’t get that it’s a metaphor. Bitcoin is a speculative asset that looks like a store of value because it has risen so high. Whether its rise will continue over the next few centuries, as gold has held its intrinsic value across millennia--we simply don’t know. Whether bitcoin is a medium of exchange or not--well, that we know. It’s not. Is bitcoin, like gold, a reserve that central banks can release from their vaults should fiat ever collapse? No. Central banks don’t hold bitcoin. To take a metaphor and treat it literally is to function (badly) under an illusion. It’s the stuff that far-too-eager zealots do when they take a universal myth as an operational imperative. You can say that describes the crypto Hodler as much as the goldbug. The difference? A 5,000-year track record.

Many define bitcoin as digital gold, but the comparison is exaggerated since the two assets are not a substitute for one another, said RBC Capital Markets.

"Gold and bitcoin are often likened to gold and digital gold. Of course, they are both 'mined,' but solid lines are often drawn when comparing the two as assets in public discourse, and we think this is overdone," said RBC Capital Markets strategists, including Christopher Louney.

The comparison has often led to arguments that bitcoin is stealing attention away from gold, connecting gold's underperformance to bitcoin's massive rally. But that is not really the case, according to the RBC report.

"Those looking for a stateless asset with a finite supply that is not a liability of any single country or entity have long gravitated toward gold. That type of thinking is also pushing some toward Bitcoin. We think this narrative drives a lot of the likening between the two," the report said. "To be clear, are some flows that might otherwise head toward gold instead materializing in Bitcoin and the cryptocurrency space? Probably. However, we do not think that is the dominant theme here."

Both gold and bitcoin have reported significant new amounts of money added to their total market cap since 2020, noted the strategists —over $1 trillion for gold and around $0.8 trillion for bitcoin.

"The narrative that gold is being displaced by digital gold (i.e., Bitcoin) is overstated," they said. "Correlation is not causation, and to be frank, there is little observable sustainable correlation in our analysis that would result in such a conclusion."

The comparison between the two assets is not dying out any time soon, the report added. Still, the key question to keep in mind is whether the two assets are at odds with one another or not. "They behave differently … We actually think this potentially makes them somewhat complementary assets that still compete on the margin," RBC Capital Markets said.

Key differences

There are critical differences between the two assets that are not often discussed, including their investment natures. Gold's total market capitalization is at around $11 trillion at current prices. In comparison, bitcoin's is around $1 trillion.

"On a relative basis, the recent price spike saw Bitcoin's peak market cap at just over $1 trillion, representing nearly 6x growth y/y in February, but when viewed side by side, the difference is stark. This relative comparison does show a powerful trend and a growing narrative for Bitcoin, but in absolute terms, market sizes are vastly different and reflective of gold's maturity," RBC's strategists said.

Another significant difference is the perceived safe-haven status of both assets. Bitcoin's volatile price moves in both directions do not reflect safety, said the report.

"More commonly exaggerated price moves and volatility for Bitcoin and cryptocurrencies at large are quite different than those for gold. Trading behavior and the data generally lean more in the speculative/tactical trading direction on average given the volatility and rapid price appreciation of late," the strategists wrote. "That tells us that that Bitcoin's recent price gains were sharper and more exaggerated than the gold rally we have seen over the last few years. Thus, for those looking purely for a risk overlay or a "perceived safe haven," gold's more consistently lower volatility appears favorable."

On top of that, there are structural differences, especially when it comes to regulatory frameworks. Gold enjoys long-established oversight and regulations, while bitcoin's framework is still being developed.

"Gold is an accepted part of the global financial system, and as such, it is globally redeemable. It is an accepted reserve asset for central banks and is traded in many forms through market places, wholesale sellers, exchanges, and via OTC transactions, etc., across the world, for which there are established rules and norms," the RBC report said. "The regulatory structure for bitcoin and other cryptocurrencies stands in contrast because it is relatively unestablished. For some, that is viewed as a positive, but something being unestablished is not necessarily permanent."

As this debate continues, RBC Capital Markets sees gold and bitcoin ending up as complementary assets in a portfolio. "Not only because (we think) there is room for both, but also because they are not as related as the gold/digital gold comparison implies," the strategists said.

Investment in bitcoin has been more about returns than diversification and adding gold to a crypto portfolio might help to reduce the risk, the report noted.

"Bitcoin's nearly complete lack of meaningful correlations with other assets presents it as a diversifier, but given its high volatility, we think adding it to a portfolio is more about returns than diversification, particularly considering the headline-grabbing nature of its moves of late. Indeed, adding gold to a portfolio of cryptocurrencies could be beneficial in reducing volatility, and in the World Gold Council's analysis, it would have improved risk-adjusted returns in a well-diversified portfolio," the report said.

There is not a lot of evidence pointing to bitcoin displacing gold. "Bitcoin probably has absorbed some allocations that would otherwise have nowhere to go if cryptocurrencies did not exist," RBC Capital Markets said.

Price comparison

Gold has underperformed in 2021 amid downward pressure from higher U.S. dollar and rising U.S. Treasury yields.

Prices are likely to stabilize after falling below $1,700 an ounce last week, but risks remain, according to RBC Capital Markets.

"Debt and policy support remain high, the dollar is weaker than it was a year ago, and in the grand scheme of things, rates are still low. Additionally, on the fundamental/physical side, we see improving consumer demand," the strategists said. "Central bank buying should improve notably versus 2020 as a helpful undercurrent, even as investor ETP demand comes off its highs set last year."

RBC's high-scenario sees gold ending the year around above $2,000 an ounce, while the low-scenario puts prices below $1,650 an ounce. At the time of writing, April Comex gold futures were trading at $1,729.90, up 0.59% on the day.

In the meantime, bitcoin hit a new record high of above $60,000 during the weekend as more institutional investors join in on the trend. At the time of writing, bitcoin was trading at $55,935, down 6.70% on the day.

Originally posted on Kitco

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