If you followed the markets recently, you have heard about the bitcoin crash. The cryptocurrency’s value slipped when Tesla, which holds over $1.5 billion in bitcoin, announced that it wouldn’t accept bitcoin as payment for its cars.
Later, the government of China announced that it would crack down on bitcoin mining and trading.
As a result, the value of bitcoin has almost halved compared to its all-time high.
But there was something else going on…
As bitcoin crashed, gold soared.
And we’re going to help you understand why that might have been the case and what to do next.
As always, our goal at The Financial Star is to bring the most important market trends to your attention and point you to potential profit opportunities.
Without further ado, let’s see what was going on in the bitcoin and gold markets and what sets gold apart from its competitors, including cryptocurrency.
Gold Provides Portfolio Protection
If you remember one thing from this article, it should be this.
Gold is a risk-off asset. It’s something investors buy to protect their portfolios from crashes and uncertainty…
It can come in various forms. A market crash, inflation, or currency devaluation… Gold is the asset you want to hold when things aren’t going well… when investors are scared.
Bonds are also a risk-off asset. Very often, when investors sense that the market isn’t going to do well, they sell stocks and buy assets like bonds and gold.
Is bitcoin a risk-off asset? So far, we haven’t got enough proof that it is.
It has a lot of the same features as gold. For example, its supply is limited.
But it doesn’t necessarily mean that bitcoin will replace gold.
Or the market isn’t ready for it yet. But the actual reason doesn’t matter. The recent price action tells you everything you need to know.
Gold, which has climbed to multi-month highs recently, does its job as portfolio protector.
Gold Isn’t a Speculative Asset
Gold is tied to the real economy. Here’s what I mean…
The biggest driver of the price of gold is interest rates. High rates push the price of gold down. Low rates lift the gold price up.
Inflation reduces effective interest rates. This is why, when inflation is high, gold soars.
And it did just that recently. As the United States posted inflation numbers over 4% (which is quite high), gold price increased.
Bitcoin, in the meantime, was falling.
The reason for this is simple. The price of bitcoin isn’t tied to anything that’s going on in the economy.
Research has shown that the single biggest driver of bitcoin price is the computing power of its network. It’s also known as the hash rate.
Put simply, the bigger the network, the more value bitcoin has.
And when a big market actor like the government of China says that it will either limit or outright ban bitcoin mining, the value of bitcoin plunges.
This is why gold is so difficult to replace. It doesn’t have a “network” that needs to be maintained at huge energy expense. Gold doesn’t rely on computers at all.
And its price is tied to what is going on in the economy. Which makes it much more palatable than cryptocurrencies for portfolio managers.
The Takeaway
Gold has been around long enough as a wealth protector… it’s not going anywhere.
And buying gold isn’t speculation, which is the case with a lot of cryptocurrencies.
This is why gold has been performing like a champ while bitcoin and other cryptocurrencies were tanking.
Now, we are not against bitcoin or other cryptos.
Our point is that it’s too early to discount gold as something that can protect your portfolio against future risks.
Cryptocurrencies are a great invention. But the recent price action has proven again that gold is here to stay.
Thank you for your loyal readership,
The Financial Star team
