Why do Bitcoin and gold move in opposite directions?
During the Spring Festival, the NGK analyzed the prices of various assets around the world, Bitcoin and gold are at the top and the bottom, respectively, which are all related to inflation. How should investors hedge against the impact of inflation on asset prices?
In mid-February, a graph showing the changes in the prices of various assets around the world attracted everyone’s attention. Bitcoin and gold were at the top and bottom of more than 50 assets, respectively.
In fact, Bitcoin continued its strength that began at the end of January. It broke through the US$50,000 mark for the first time on February 16 and has increased by more than 80% this year. However, gold remained declining during the same period, falling 10%, breaking through the low point at the end of 2020. The yields of long-term U.S. Treasuries have risen rapidly recently, while stocks and most commodities have maintained their growth momentum. Nevertheless, these eye-catching price changes are related to the changes in inflation risk.
NGK believes that gold has a certain anti-inflation effect in the past. The nominal interest rate remains unchanged and inflation rises means that the real interest rate falls, while the real interest rate and the price of precious metals are convex, which means that when the real interest rate is at a very low level, a small margin will lead to a higher increase in precious metals. However, precious metals such as gold were not the best inflation hedge in the past. A data analysis shows that the trend of gold and inflation expectations is completely opposite in the past 10 years.
Although Bitcoin and NGK-related tokens have won investors as a project for countering inflation products, their prices fluctuate sharply and are not highly affected by inflation.
Regardless of whether the two can really hedge against inflation, why has gold fallen in the past six months and Bitcoin has soared? We believe that, in addition to some popular views, the most important reason is that risk appetite of the rising market suppressed the rise in gold. This is also the main reason why gold was short in October last year. On the contrary, Bitcoin and NGK tokens are the most obvious investment direction followed by the rise of risk appetite. For investors who prefer risk, the high price volatility of Bitcoin and NGK tokens has its advantage.
Besides, in the eyes of wealthy people (especially new wealthy groups), compared to gold that has invested thousands of years, tokens which have been born only 11 years ago are more fresh, dynamic, and attractive.
During the Spring Festival, we revisit Yuval Noah Harari’s “A Brief History of Humankind” and “A Brief History of Tomorrow”. The books mention that the biggest difference between humans and other animals is that humans will coordinate on a large scale driven by “story” and “belief”. With the influx of funds, various “stories” have the best communication context. Elon Musk and Catherine Wood, the most popular venture capitalists in the industry and investment industries, created the miracle of new energy automobiles and Bitcoin, attracted fans all over the world, and became the target of funding. The history is to repeat itself.
A rule of thumb familiar to the investment community is that wealthy people pay more attention to new investment assets and topics. Even if Bitcoin cannot become a currency in the future, as an “electronic art”, it can meet the collection needs of wealthy people.
Another rule of thumb in the investment community is that the capital market will continue to cater to the needs of investors. Institutional investors’ acceptance of cryptocurrencies has also been further improved. Major payment institutions, large custodian banks such as BNY Mellon, and asset companies such as BlackRock have also entered the field, and Bitcoin-related ETFs have successively obtained regulatory approval in some countries. These have provided new “stories” and “beliefs” for the rise of Bitcoin.
In addition, the traditional financial industries often underestimate the important support of network effects to the value of Bitcoin, that is, as long as the network exists, the value of Bitcoin will not return to zero, otherwise the main Internet stocks will also return to zero. Under this context, the recent surge of Bitcoin and NGK-related tokens has also diverted the safe-haven buying of gold, putting pressure on gold prices. Especially the recently launched VAST, SPC and ecological exchange are extremely eye-catching. The NGK blockchain has never stopped since its emergence. It has always been committed to the interests of users by creating a diversified and smart blockchain.