Why hasn’t Bitcoin risen with gold amid market chaos?

I’m bullish on Bitcoin in the long term, but if global markets collapse in the short term, Bitcoin will fall with it, while gold won’t.

Gold has reached an all-time high of $2,500 an ounce. It’s not close to where gold traded in January 1980, in inflation-adjusted terms. But it’s getting close.

Gold is rising because investors are preparing for lower U.S. interest rates, a weaker dollar, and a tech stock crash. So why isn’t Bitcoin participating in this rally?

Bitcoin is, of course, much higher than it was at the end of 2022. However, there’s a difference between the steady rise in gold prices since 2000 and the sudden surge in Bitcoin prices.

The difference is that if investors are worried about financial instability, they turn to gold. Bitcoin is the ultimate risk-on investment, with the characteristics of a technology asset.

Not a depreciation hedge

Bitcoin is not a depreciation hedge, nor is it a hedge against the tech bubble, with several top investors such as Warren Buffett and George Soros recently announcing that they have exited certain areas of the high-tech industry.

Hedge fund Elliott has warned that the AI ​​craze is a hype, especially Nvidia's stock price, as they say AI has entered bubble territory. The author generally agrees with this assessment.

The reason is that this revolution will not prevent the long-term decline in productivity growth across the West. The United States has successfully reversed the trend of slowing productivity growth, but if you exclude the technology industry, the United States is not much different from Canada or Europe.

The productivity miracle of the technology industry is related to the stock market that provides cheap capital to the industry. When this capital flow ends, the productivity gap between the United States and Europe is expected to narrow.

If productivity growth slows, why can corporate profit growth remain high? Based on current valuations, they think so. In the long run, you would expect the two to be the same.

There are multiple ways to look at gross domestic product (GDP). One way is to think of it as the sum of all profits and all wages.

For most of this century, profit growth has outpaced GDP growth, and therefore wage growth, as politics and demographics favored corporate profits.

That is now changing. Until the last century, the S&P 500's P/E ratio fluctuated between just below 10 and 20. That was a period of relatively high productivity.

The current P/E ratio is 26. The Nasdaq is 40. It's hard to imagine how these valuations can be sustained if long-term productivity growth declines.

Highly Valuable Tech Stocks

The extremely high valuations of tech stocks and crypto assets are based on extremely optimistic assumptions about future earnings growth.

Crypto offers the promise of financial innovation, but it may take another decade or two before it becomes macroeconomically relevant.

Artificial intelligence will undoubtedly impact people's lives. But both the rosy visions and the panic stories about AI are overblown.

ChatGPT is useful for technical tasks, especially programming, but seems to be of no help at all for journalism.

Remember in 2017, everyone predicted that we would have self-driving cars by now? That utopia is still years away.

If you’re lucky, you could have cars driving themselves on the highway in 10 years.

Bitcoin boom?

So what happens to Bitcoin if the market crashes? Bitcoin is, of course, as inflation-resistant as gold, or even more so.

Gold has supply risk. Central banks could flood the market with gold reserves. Or new gold could be discovered. But new Bitcoins won’t be found. There can’t be a supply shock.

Unfortunately, that doesn’t solve the problem. Right now, Bitcoin’s fate is intertwined with that of the tech sector. Many investors view cryptocurrencies as part of their tech portfolios.

Crypto assets, especially Bitcoin, have acquired the attributes of traditional investments over the years through exchanges, stablecoins, and spot ETFs.

Gold sits at the other end of the portfolio — a safe-haven, boring part.

People don’t generally invest in gold to make a fortune. Gold investors behave more like a cult. I’ve always wondered why so many older male gold lovers wear bow ties. It’s a weird bunch.

The crypto world has its fair share of weirdos, but it’s very different from gold.

This also applies to the way both react to bubble bursts. In this scenario, liquidity will drain from the system. Traders will rush to meet margin calls.

The financial world is not as fragile as it was in 2008. But the authors argue that a tech crash of the magnitude that is expected would be a source of financial instability.

So when markets crash, expect Bitcoin to crash with it. But Bitcoin and other crypto assets will eventually recover, as will some (but not all) of the currently soaring tech stocks.

The reason we are optimistic about the long term is that crypto assets have one important thing in common with gold: scarcity makes them a safe long-term investment.

This is true even if most investors don’t view Bitcoin that way right now.

A few years ago, we rejected the idea that scarcity had intrinsic value, feeling that it needed to be tied to something else, like industrial use, aesthetic value, or, in the case of gold, a time-tested consensus that it was valuable in and of itself.

We have changed our minds on this point. In a world where central banks are recklessly expanding their balance sheets and governments are turning their currencies into geopolitical weapons, guaranteed scarcity has value in and of itself.

But this is for the long term. If the bubble bursts in the next year or two, I believe Bitcoin will fall with it. But gold will not.