Prior to the Bitcoin (BTC-USD) ETF hype of last year, I repeatedly argued that “Bitcoin will diverge” as I grew increasingly confident that a credit event would occur before the end of 2023. Although that credit event did not manifest, Bitcoin did indeed perform well even as risk assets were dropping hard from August to the end of October. In that period, its correlation against stocks seemed to be breaking.
At the same time, gold started showing signs of life. Why? Because the play then was to hedge against counter-party risk. To position into something that can march to its own beat and act differently as a long-only portion of a portfolio.
Looking back, it’s clear that Bitcoin was acting more “risk-off,” benefiting from stock market volatility.
Then the Bitcoin ETF hype got turned up. BTC prices surged as Bitcoin became more accessible to financial advisors through spot ETFs and speculative mania returned. In other words, Bitcoin went back to acting like a levered risk-on play all over again. Gold, on the other hand, continued to hold onto its gains and act largely uncorrelated.
The interesting thing here is that for all the hype around Bitcoin, it’s performed the same as gold roughly since March or April of 2021.
And now, with the Bitcoin ETFs potentially fueling some shorting, Bitcoin may not diverge. Instead, gold might be the real play for investors seeking assets without correlation to stocks.
I never liked the “gold versus Bitcoin” argument. I never liked the “Bitcoin is digital gold argument” – nor did I like the argument that either asset is a store of value. However, gold and Bitcoin can act as counter-party hedges. Right now, with speculative mania in BTC, investors should pay attention to gold, especially as it starts to wake up.
The Bottom Line on Bitcoin vs. Gold
If Bitcoin were to maintain its correlation to falling equities while gold prices hold up, then you may see institutions rotate out of Bitcoin ETFs into gold ones. You could also see more demand for gold ETFs to smooth out the returns of Bitcoin.
The point remains the same. Bitcoin does have a chance to diverge again and act like a risk-off play, but the overconfidence around the Bitcoin ETF narrative makes me skeptical.
It’s gold’s time now to shine precisely because few are looking at the analog shiny object as everyone is looking at the digital one.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
