Looking back at 2024, it was a year of record runs for both gold and Bitcoin. Gold gained around a quarter in value, reaching a new record of almost USD 2,800 per ounce. Bitcoin’s run was even more remarkable. Prices more than doubled, topping the threshold of USD 100’000 for the first time ever as the year came to a close.
How similar are gold and Bitcoin?
At first sight, they seem very different. Gold is a natural asset, having earned its reputation as a safe-haven and store of value over thousands of years. Bitcoin, in contrast, is a technical asset, having emerged at the end of the Great Financial Crisis when the trust in the traditional financial system was at an all-time low. While Bitcoin exhibited excessive volatility in the past, its ambition is to be a sound form of money, and this is where the similarities with gold start to emerge. Some still see gold as a sound form of money, reminiscent of the times of the gold standard that ended in the 1970s. And in the days of the Great Financial Crisis, the lack of trust in the financial system also propelled gold prices to a series of record highs.
At second sight, there are quite a few similarities between the two. Both are supply constrained. For gold, these constraints are geological. It is a rare resource with few big discoveries being made during the past couple of years. Mining gold has become ever more complex, in terms of the depth of the mines and number of rocks that need to be moved. Ore grades are in structural decline, pushing up production costs. For Bitcoin, the supply constraints are technical. They are hard coded into the blockchain, limiting the maximum total supply to 21 million tokens and dictating a halving of the block reward every four years, roughly speaking. Bitcoin’s halving is it’s equivalent to gold’s declining ore grades and the energy needed to solve Bitcoin’s cryptographic puzzles is equivalent to the energy needed to mine gold. There are also similarities on the demand side. Neither the demand for gold nor the demand for Bitcoin are exposed to the ups and downs of economic cycle, but rather the appetite of investors to hold these assets in their portfolios.
The hedging characteristics of gold and Bitcoin exhibit many similarities but also some differences. First, both should serve as hedges against systems risks in financial markets. In case of a breakdown of the financial system, they should be a safe haven. While not tested since the Great Financial Crisis, gold has demonstrated this characteristic multiple times in the past and Bitcoin – based on its origins – is designed to provide strong security and a high degree of decentralisation.
Second, there is the risk of dedollarisation. It has been debated more intensively as of late, fuelled by the weaponisation of the US dollar in the context of growing geopolitical tensions as well as concerns about the ballooning deficits and rising indebtedness of the United States. Priced against the dollar, both gold and Bitcoin can be seen as ‘anti-dollars’ and should therefore hedge against the demise of the dollar as the world’s global reserve currency. While other currencies have gained in importance in terms of trade and also currency reserves as of late, dedollarisation is much more theory than reality.
Third, gold and Bitcoin could serve as hedges against inflation. Both are supply constraint, in contrast to fiat money, which can be ‘printed’ by the central bank and is therefore in unlimited supply. That said, not all inflation is created equal. Gold and Bitcoin should hedge against ‘bad inflation’, which results from reckless fiscal and irresponsible monetary policy, leading to a loss of trust in a currency and a massive devaluation. They should not hedge against ‘good inflation’, which emerges from a strong economy and is typically countered by the central bank with more restrictive monetary policy.
Fourth, there is the risk of economic shocks and equity market corrections. During such shocks, gold typically demonstrates its safe-haven status, holding its value or even increasing it. It is very much a risk-off asset, in contrast to Bitcoin which remains a risk-on asset. Bitcoin tends to move with the equity market, exposing it to material downside risks in case of a correction. Hence, when it comes to equity market corrections, gold is a hedge while Bitcoin is not. Nonetheless, outside of such shock periods, the inclusion of Bitcoin in a well-diversified portfolio tends to add value via improved risk-adjusted returns.
Which of these risks are most likely to strike in 2025?
The start of the year points to elevated equity market volatility, which would put gold at an advantage over Bitcoin. That said, we still observe very strong demand for Bitcoin and prices have been holding up well despite increased equity market volatility. The other risks seem much less likely in our view, even though inflation could surprise to the upside in the United States. Whether or not gold and Bitcoin will be good hedges should this scenario materialise depends first and foremost on the reaction of the US Federal Reserve and the regulatory changes related to Bitcoin and other digital assets in the United States.
