Despite claims that Bitcoin is the digital equivalent of gold over the past decade, the correlation between the two assets are growing weaker in recent years, says DBS forex exchange and credit strategist Chang Wei Liang.
Bitcoin, the most famous cryptocurrency and the largest by market capitalisation at around US$558 billion ($750 billion), has been compared with gold as the two assets bear some similarities, particularly in how they can be obtained through mining and their limited availability. Additionally, both are forms of currencies as well as a store of value against fiat currencies that are easily transferable.
Only 21 million Bitcoins can be mined and about 90% of them are already in circulation. Given the similarities, some market observers expect the cryptocurrency to behave the way gold does — retaining or increasing in value during times of market turbulence.
In terms of pricing, gold has certain safe-haven properties that Bitcoin does not possess, says Chang. For one, at the onset of the pandemic, gold rallied from about US$1,600 per ounce to US$2,000 per ounce at its peak in 2020. In comparison, Bitcoin lags behind, only starting an upward rally at the end of 2020 to a peak of over US$63,000 apiece in April the following year.
“Bitcoin performed stronger moving to 2021 when the global economy was at a more solid footing, whereas gold prices were easing, partly reflecting the fact that the safe-haven demand has diminished compared to what it was at the height of the pandemic. Therefore, we think that the correlation between the two assets is not stable, largely because Bitcoin is not quite the safe-haven asset that gold is,” says Chang.
Analysts at BMI Research have raised the concerns that as cryptocurrencies become a mainstream financial asset, younger retail investors are more likely to place new investments in cryptocurrencies at the expense of gold.
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“The rise of cryptocurrencies poses clear downside risks to gold in the long term. However, in the short term, investors of both assets may have fundamentally different goals,” they say.
The analysts add: “Investors may choose gold as a traditional safe-haven asset to hedge against inflation, whereas many investors in cryptocurrencies could be more speculative. As adoption rates for cryptocurrencies increase, its safe- haven status could strengthen.”
