Why hasn't Bitcoin risen alongside gold prices in a chaotic market?

Author: Wolfgang Münchau, DLNews

Compiled by: Felix, PANews

Gold prices have reached a historic high of $2,500 per ounce. When adjusted for inflation, it is still far from the gold trading price of January 1980. However, it is approaching that level.

The rise in gold prices is due to investors preparing for a decline in U.S. interest rates, a weakening dollar, and a collapse in tech stocks. So why hasn’t Bitcoin participated in this rally?

Of course, Bitcoin's price is much higher than it was at the end of 2022. However, the steady rise in gold prices since 2000 is different from the sudden surge in Bitcoin prices.

The difference is that if investors are concerned about financial instability, they will turn to gold. Bitcoin is the ultimate risk asset, characterized by its technological nature.

Not a Hedge Against Depreciation

As the author pointed out in the previous column article, Bitcoin is not a hedge against depreciation, nor is it a hedge against the tech bubble.

Several top investors, including Warren Buffett and George Soros, have recently announced that they have exited certain areas of the high-tech sector.

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

The reason is that this revolution will not stop the long-term decline in productivity growth across the West. The U.S. has successfully reversed the trend of slowing productivity growth, but excluding the tech sector, the U.S. is not much different from Canada or Europe.

The productivity miracle in the tech sector is related to the stock market providing cheap capital for the industry. When this flow of funds ends, the productivity gap between the U.S. and Europe is expected to narrow.

If productivity growth slows, how can corporate profit growth remain high? From current valuations, they seem to think so. In the long run, you would expect both to be the same.

There are various ways to look at Gross Domestic Product (GDP). One way is to view it as the sum of all profits and all wages.

For most of this century, profit growth has outpaced GDP growth, and thus wage growth, because political and demographic factors have favored corporate profits.

This situation is now changing. Until last century, the price-to-earnings ratio of the S&P 500 fluctuated slightly below 10 to 20. That was a period of relatively high productivity.

The current price-to-earnings ratio is 26. The Nasdaq index is at 40. If long-term productivity growth declines, it is hard to imagine how these valuations can be sustained.

Overvalued Tech Stocks

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

Cryptographic technology brings hopes for financial innovation, but it may take another ten or twenty years to become relevant to the macroeconomy.

Artificial intelligence will undoubtedly impact people's lives. However, both the rosy visions and the panic stories about AI are overly exaggerated.

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

Remember in 2017 when everyone predicted we would have self-driving cars by now? We are still many years away from that utopia.

If lucky, we might see cars driving themselves on highways within ten years.

What Happens to Bitcoin in a Market Crash?

So what would happen to Bitcoin if the market crashes? Of course, Bitcoin has inflation-resistant qualities similar to gold, and even stronger.

Gold carries supply risks. Central banks may flood the market with large reserves of gold. Or new gold may be discovered. But no new Bitcoins will be found; there cannot be a supply shock.

Unfortunately, this does not solve the problem. Currently, 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 gained traditional investment attributes over the years through exchanges, stablecoins, and spot ETFs.

Gold sits at the other end of the investment spectrum—a safe, boring part.

People generally do not invest in gold to make a fortune. The behavior of gold investors is more akin to a cult. The author has often wondered why so many older male gold enthusiasts wear bow ties. It is a strange group.

The world of cryptocurrencies also has its share of oddballs, but it is entirely different from gold.

This also applies to how both respond to a bubble burst. In such cases, 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. However, the author believes that the anticipated scale of a tech stock crash could become a source of financial instability.

Therefore, when the market crashes, Bitcoin is expected to crash as well. But Bitcoin and other crypto assets will eventually recover, as will some (but not all) of the currently soaring tech stocks.

The author remains optimistic in the long term because crypto assets share an important commonality with gold: scarcity makes them a safe long-term investment.

Even if most investors do not currently view Bitcoin this way, it is indeed the case.

A few years ago, the author did not accept the notion that scarcity has intrinsic value, feeling it needed to be tied to something else, such as industrial use, aesthetic value, or, in the case of gold, a time-tested consensus that it has value in itself.

Now the author has changed his mind on this point. In a world where central banks recklessly expand their balance sheets and governments turn their currencies into geopolitical weapons, guaranteeing scarcity itself has value.

But this is a long-term perspective. If a bubble bursts in the next year or two, it is believed that Bitcoin will also fall. And gold will not.