Dear All,

Gold and bitcoin both can be seen as debasement hedges. Bitcoin is sometimes described as gold for the digital age. The argument is that, similar to gold, bitcoin has limited supply and is cheap to store and therefore can act as an effective hedge against currency debasement. It is also easier and quicker to transfer without intermediary parties. As a result, some argue that, as the world becomes more and more digitalized, bitcoin has a high likelihood of becoming a digital store of value and a disruptor of gold. An alternative view is that bitcoin will struggle to find a practical application for itself apart from speculative purposes, preventing it from becoming an effective store of wealth.

We find that gold is a defensive real asset and bitcoin is a risk-on long-duration asset. Because bitcoin’s value proposition is based on the extent of its future adoption and potential usefulness, its duration is much longer than that of gold. Over the last year, we saw the end of a decade of easy money with US 10-year real rates moving from -1% to +1.2%. This led to a sharp reduction in net speculative positions in gold and bitcoin. However, while gold is roughly flat YoY, outperforming the 60/40 portfolio similar to other real assets, bitcoin is down 75% in line with high-growth companies. The gold price has been supported by an increase in non-speculative demand by jewelery buyers, CBs and recession hedging investors.

We expect tighter financial conditions to be a bigger drag on bitcoin returns vs gold going forward. We find that bitcoin adoption has been boosted by easy financial conditions as some investors seemed more willing to explore low liquidity, high risk/high return options like bitcoin. Our economists and strategists expect financial conditions to be structurally tighter going forward. This means that future growth in bitcoin adoption would likely have to be driven more by the development of real use cases vs speculative interest. We believe the development of real uses cases is also crucial to reducing bitcoin’s volatility, but is by no means guaranteed and may take a long time to play out. Tighter liquidity should be a smaller drag on gold, which is more exposed to real demand drivers such as growth in Asian consumer purchasing power, EM central bank monetary demand and safe-haven demand by investors.