GOLD TRUMPS BITCOIN AS A DEBASEMENT CHOICE

Amidst the current fiscal worries across DMs (developed markets) & never-ending government debt levels, investors globally were looking for assets which can stand ground against dollar. Should fiscal discipline weaken further or political tensions heighten more, leading to expanded money supply or renewed quantitative easing, both gold and cryptocurrencies were looked upon as alternative stores of value. This theory was coined as debasement trade.

Both Gold & Bitcoin were seen as not impacted by ups and downs of economic cycles. Both offered hedging opportunities for investors from systematic risks in financial markets. Both are supply constrained as well. But recent underperformance of Bitcoin gives credence to Gold as a better hedge against fiat currencies.

The fall in Bitcoin is consistent

Bitcoin has fallen as much as 7.4% to dip below the $100,000 mark yesterday for the first time since June, down more than 20% from a record high reached a month ago. Long-time Bitcoin holders have offloaded around 400,000 Bitcoin over the past month, an exodus of about $45 billion that’s left the market unbalanced.

Chart 1: Bitcoin Fall Uninterrupted

Unlike the cascading wipeouts that triggered the October crash, the current slide has been led by a steady round of selling in the spot market. That marks a shift from the pattern crypto traders have come to expect lately, where sudden bursts of volatility are typically driven by liquidations in futures markets.

Roughly $2 billion in crypto positions were liquidated over the past 24 hours, according to CoinGlass, modest compared to the $19 billion in forced unwinding that punctuated last month’s crash. Open interest in Bitcoin futures remains subdued, and options traders have been placing downside bets through put contracts targeting the $80,000 level. And leverage is not the issue for current bout of selling. The current round of selling is from long term holders of Bitocin.

More than 319,000 Bitcoin have been reactivated in the past month, mainly from coins held for six to twelve months suggesting significant profit-taking since mid-July. While some reactivation stems from internal transfers, much of it reflects real selling.

So why the current bout of selling. We can look at changing interest rate outlook in US itself. Fed Chair Powell has recently indicated in his press conference after FOMC meet on 29^th Oct that Dec rate cut was not a done deal.

So, we decided to look at historical relationship between Fed rate actions vs Bitcoin levels. Higher cryptocurrency prices tend to coincide with the Fed opting for lower interest rates, as the price of bitcoin surged during the pandemic as rates fell, rising from $5,000 in March 2020 to around $69,000 by November 2021, and when the Fed opted for rate hikes in 2018, the value of bitcoin fell from around $20,000 to roughly $3,000.

Also, the recent strength in Dollar due to delayed Fed rate cut cycle is likely to have led to the current fall in Bitcoin.

Gold on the other hand is relatively stable

Gold has performed far better than Bitcoin as a debasement choice. Gold which has fallen only 10% from it’s record high reached recently. We believe Gold as a hedge for geopolitical risk or IV (Implied Volatility) explosion is far more effective than bitcoins.

Gold has a proven history of thousand years, lower IVs (implied volatility) & an established global regulatory framework for it’s measurement and use. Gold has a large natural set of institutional buyers such as global central banks who are looking for stable non-dollar assets to invest their reserves.  

Summary: If one agrees that dedollarisation is the theme for future, then Gold looks a more stable & effective hedge than Bitcoin. Gold has demonstrated it’s hedge effectiveness multiple times during systematic risk events in the past two decades but Bitcoin seems to have more volatility and less hedge ability during volatile times. During risk off events such as past two days where globally equities have underperformed, Gold’s risk adjusted return is far better than Bitcoin.

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