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Redefining Gold…digitally! Gold & Bitcoin as Shock Absorbers in Challenging Times

Having undergone legal, technical and public scrutiny by regulators, in addition to robust investment analysis by respected investors, over the course of more than a decade, a balanced view has begun to take shape whereby Bitcoin is emerging to be perceived as “digital gold”.

Ironically, a few years back, the big banks were only interested in the potential of blockchain, i.e. the underlying technology that was actually engineered within the Bitcoin codebase. Now this elite cohort of institutional investors that extends from ultra-high net worth individuals and big corporations to pension funds, hedge funds, university endowment funds, asset managers, banks, family offices, which have all been largely on the sidelines until recently, are beginning to buy Bitcoin. Why? They see it as a hedge to anticipated inflation in the money supply—a space previously nearly exclusively occupied in financial markets by gold.

In short, Bitcoin is being bet on by Wall St. to disrupt central banks as a negatively correlated hedge against fiat currencies. Hence the recent movement across the globe by many governments and central banks engaging with regulatory bodies with respect to CBDCs, or central bank digital currencies, evidently a realization that they must adapt norms and standards to reflect the reality that is the new digital money paradigm.

Therefore, it’s no surprise that Bitcoin is being accepted as a virtual version of gold because it certainly appears to pass the duck test. Like gold, Bitcoin is also a relatively scarce asset that is useful (gold→industrial production; Bitcoin→money transfer system). And like gold, Bitcoin, by its very independence, has a minimally weak correlation with traditional assets such as stocks and bonds. And, although relatively infrequent, both can also be accepted as a medium of payment. Furthermore, both gold and now Bitcoin are simultaneously viewed as speculative investments as well as safe-haven investments, where many investors tend to flock at times of market distress. Notwithstanding the foregoing, the correlation of Bitcoin and gold both strengthen in relation to traditional asset classes in times of economic shocks, just like all other non-cash risk assets.

Bitcoin is clearly similar to gold if you credit the foregoing metrics. One could even construct a similar investment thesis and strategy for Bitcoin as one would for gold, as a traditional portfolio hedge. However, Bitcoin displays certain characteristics that arguably make it in several ways superior to gold as a hedging instrument for investment portfolio diversification and long-term value preservation. For example, while gold’s value is based on stock-to-flow models and other traditional market-based valuation methodologies, Bitcoin’s value is derived on similar ones, plus a number of other economic forces such as network effects, more akin to the astronomical network-based valuations seen in the big tech sector.

Maybe Bitcoin is in essence “digital gold”, but perhaps it is also better at being gold than gold itself, primarily because of its impact on global payments, but of course due to many other factors. They are actually in two different asset classes, both having shown historically weak correlations with traditional financial assets, and while Bitcoin might compete with gold as a portfolio hedge, there is not much competition between them apart from gold’s first-mover advantage in capital markets due to its ancient usage and acceptance as a form of currency.

The above views and opinions are my own and do not reflect the views of any organizations or institutions with which I may be employed, directly involved or affiliated.  Before purchasing or speculating on either gold or Bitcoin, prospective investors can benefit significantly from consulting with professional financial advisors and conducting thorough due diligence and research. 

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