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April 23, 2021

It’s Gold and Bitcoin, not Gold vs Bitcoin

By Antti Saarnio

Gold investors and crypto investors have traditionally been in separate camps. If you are into crypto, you would think that gold is not exciting at all and its returns are not comparable to Bitcoin’s returns. If you were into gold, you would think that bitcoin is for the crazy ones and gold is the only long term store of value. 

Despite these differences in perceptions on gold and bitcoin between their respective investors, one should also consider the value of investing in both.

Gold and Bitcoin together

In the current financial market conditions, Bitcoin investors are starting to increasingly buy gold to hedge from crypto volatility while gold investors are becoming interested in Bitcoin's incredible returns. Perhaps both the rationale of gold and bitcoin investors are after the same thing: to hedge against fiat currencies and central bank money printing actions. 

Investors view both Bitcoin (BTC) and Gold as safe-haven assets against inflation. The Fed and other major central banks have flooded the markets with money to keep economies running and there is no end in sight for this policy. In layman terms, central banks are printing money, which a rational investor would suspect leading lack of trust on the fiat currencies, which then would lead to lost value of such currencies against other assets which amount is limited i.e. Gold, Silver, Bitcoin and ETH. 

Fed balance sheet 2008 - 2021

Investment scenario with both Gold and Bitcoin

To give you a clearer picture on what an investment with both gold and bitcoin would be like, let’s take a look into the past and see how rational gold and bitcoin investors would have behaved with perfect knowledge of market development from 2017 to this day.

The year 2017 was a strong crypto bull market. Rational investors would have overweight bitcoin, but would have started increasing gold’s share in their portfolio in the later part of the year to hedge against potential crash. 

Then in December 21st 2017, Bitcoin price started crashing. Between December 2017 and April 2018, the price had dropped by 49%. At the same time period, gold’s price had increased by 7%. Crypto winter continued until February 2019, when BTC price had dropped 74% from the top, while gold price was up by 4%. 

If a rational investor holding 10 BTC (134,120 USD) would have sold all his BTC just before the crash and bought gold with it then bought BTC again in February 2019, the rational investor would now have 40.5 BTC, while HODL strategy crypto investor would still have his 10 BTC. 

Bitcoin's price in gold 2017 - 2021 March

From February 2019, crypto started its new bull run, far exceeding the price growth of gold. The rational investor would now have put his bets on bitcoin, even though gold was performing well. During this bull run, which lasted until July 2019, Bitcoin increased by 206% to the US dollar, while gold price increased by 7% during the same period. 

The next  six-month cycle went again to  gold. From July 19 to January 2020, Bitcoin price decreased by -32%, while gold price grew by 11%. If a rational investor would have bought gold with all his 40.5 Bitcoins, he would, in January 2020, have 300 Ounces of gold, valued 477,000 USD.  

In March 2020, almost all asset prices crashed. Bitcoin crashed by -49% at most, and gold crashed by -12%. Let’s assume our rational investor was still holding his assets in gold. Perhaps he was concerned about the Covid-19 news and was being careful with crypto being a more volatile asset. The rational investor would have made an extremely smart move and switched from gold to bitcoin right after the crash, just after bitcoin price started recovering from the bottom. 

On 20th of March, this legendary investor sold his gold at price of 1494 USD/Oz and bought Bitcoin at price 6000 USD/oz, not the lowest of the lowest price, but still an amazingly low price. The rational investor now had 75.5 Bitcoins, which value would prove to be quite amazing after a year of incredible crypto bull run. 

By April 12th 2021, the price of bitcoin was 60,000 USD.  Our rational investor’s 75.5 bitcoins is now valued at 4.5 million USD, 7.5 more than if he would have held his original 10 BTCs which would be valued at 600,000 USD.

Portfolio value: Bitcoin hold strategy vs Gold-BTC strategy

Of course, we are not investing with perfect information on hand. This is why the story above is theoretical, but this clearly shows that gold and bitcoin can be a good combination for rational investors.

Further potential of Gold for Bitcoin investors

Still doubting gold? Didn’t gold’s price just drop from all time high 2000 to 1700, almost -17% in the last 6 months while Bitcoin’s surged 80%? 

See, there exactly is the beauty of investing in both Bitcoin and gold. Their value does not correlate too much. When Bitcoin is going up, gold might be going down. Recently, data shows that money has been flowing from gold funds to bitcoin, further pushing gold prices down. Where do you think this money goes when the crypto winter starts? Back to Gold. Gold’s price has, in the long term, grown with the same ratio as the central bank’s money supply. More money printed, the higher the gold price. At the moment, the gold/central bank money supply ratio is at its lowest. This means that in case central bank money printing continues, gold has lots of potential. 

I believe that in the long term both gold and bitcoin will have an excellent future as central banks seem to be continuing with their asset expansion policy. We should not treat gold and bitcoin as competitors but like a younger (BTC) and older brother (gold), where when in times of turbulence, the younger brother is replaced with the older one, which is more stable and able to weather the storm. 

PS. While decision making for switching between bitcoin and gold might be challenging for humans, there are algorithms which are able to make the decision on behalf of us. Lohko has developed its own proprietary algorithm, which is able to dynamically adjust the portfolio based on the price development and is also able to protect investors from market crashes.

Note: this example is for informational and entertainment purposes only and should not be relied upon for any other use.
© Lohko Pte. Ltd 2021
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