Gold Paint and the Digital World

Say what you want about the asset that some people say has no intrinsic value, but Bitcoin has held up incredibly well in the last two months of financial market mayhem. Down only 12% from its all-time high in January, and still up more than 40% from November 5th, it is also one of the few survivors of the so-called Trump trades, most of which have unravelled horribly, just ask Elon. 

So, is Bitcoin the new digital gold? “You've never been able to match gold with gold paint. That's why it's gold”, said Donald Trump, and there are clearly very large differences in buying bullion versus a token on a virtual exchange. Having said that, if we buy a gold futures contract the risk is the same as buying a Bitcoin futures contract. In other words, if we are worried about Armageddon, we need to invest in gold coins; if we think the US government printed too much money, then we need to hold some Bitcoin.

Are there portfolio diversification benefits of investing in either gold or bitcoin, or both? Since we are having trouble understanding whether they are a currency, a commodity, or a mere instrument of speculation, we should expect them to move somewhat differently from the rest of the markets, and they do. However, neither will necessarily protect us when financial markets come under duress. Both went down during Covid and didn’t save us in the meltdown of 2022 either.   

What about performance? Here, a lot will depend on the period of observation, but Bitcoin went from 0.003 to 93000 in fifteen years, which is more than gold has ever done in a thousand years. Of course, Bitcoin could also go back to zero, which for Gold is difficult to imagine. On the other hand, if the world normalises again, which it will at some point, because it always does, then it is more likely that gold goes to 2000 than Bitcoin being any lower than 100000.