Bitcoin and Gold: Deciphering the Connected Trends?

Recently, two alternative investment products that are generally considered higher risk with higher returns have both reached new highs: Bitcoin and gold. Often referred to as “digital gold,” Bitcoin surpassed its November 2021 high in March. Meanwhile, gold prices also broke through their early December levels, achieving historical highs.

Reasons for the Surge:

Investors fear missing the buying opportunity before the Bitcoin’s halving in late April, driving increased demand for Bitcoin spot ETFs. Large Bitcoin spot ETFs recorded nearly $8 billion in net inflows, resulting in supply shortages. Additionally, the rapid expansion of US debt at a rate of $1 trillion every 100 days has led to “credit devaluation” trading approaching historical highs, boosting both Bitcoin and gold prices.

Correlation Between Bitcoin and Gold Trends:

1. Limited Supply: Gold is a physical precious metal with limited supply, and Bitcoin’s maximum supply is 21 million coins. Both products are not controlled by any central authority.
   
   
2. Hedging: Gold has long been considered a safe-haven asset that maintains value during turbulent times. Although relatively new, Bitcoin is viewed as a digital hedge. Geopolitical tensions, such as the ongoing Russia-Ukraine conflict, Israel-Hamas clashes, and the Red Sea cargo ship attack, contribute to the rise in both Bitcoin and gold prices.
   
   
3. Diversification: Large gold reserves can serve as a trusted source of a country’s solvency. Central banks worldwide have been on a strong gold-buying spree since last year, aiming to diversify reserves. Emerging economies like Turkey, China, and India have significantly increased their gold holdings. For instance, the People’s Bank of China has continuously increased its gold reserves for 15 consecutive months, reaching 72.19 million ounces in January 2024, an increase of 320,000 ounces from December 2023.
   
   
4. Seize Opportunities in Gold Price Trends: As other asset prices, including Bitcoin, have reached high levels, funds are seeking alternative paths, and gold prices may catch up. Besides physical gold, consider gold ETFs and gold mining stocks. Leveraged gold trading is also an option. While the upward trend in gold prices has begun, short-term momentum may slow down. Leveraging volatility can potentially multiply returns, but limited profit space should be noted.

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