bitcoin: Gold vs Bitcoin: Which asset has the upper hand on the other side for the last five Diwali

Historically, Diwali has been an auspicious occasion for happiness, joy, light and prosperity. The same has also been an event for large purchases, gifts and sweets. But a gift that has stood the test of time and not lost its shine is gold. Gold symbolizes wealth, security and financial well-being. But as it has aged, many new ways to buy, give and transfer gold have emerged.

In recent times, digital gold and sovereign gold bonds have been the preferred modes for many investors, as these options take the hassle out of buying and storing gold. While the storage and earning of gold’s value has been digitized, another asset that is highly transferable and has outperformed gold is Bitcoin (BTC).

Touted as digital gold, BTC has many similar characteristics to gold, namely global availability, high demand and low supply. The supply and discharge of BTC in the market cannot be changed as it is algorithmically programmed. The same factor helps drive the price of BTC over time. The total emissions of BTC in circulation decrease over time as emissions are halved every four years.

Traditionally, on birthdays and other auspicious occasions, there has been a culture of giving stocks and other hard assets for a long time. Yet, with changing times, new avenues should also be explored.

For a competitive quantitative analysis, if you had bought INR 50,000 worth of gold for every year starting 2017 on Diwali, your current portfolio value on an investment of INR 2,50,000 would be INR 2,79,150. If you had bought BTC immediately , the return would be INR 5,29,250.

Gold VS BTC performance over the last five years (if bought across Diwali) – data points/graphs:


A) The data points and graphs below show the profit or loss (%) and current value resulting from buying Bitcoin or Gold on Diwali day for the corresponding year and holding the position till today. Suppose a person buys bitcoin or gold on October 19, 2017 (Diwali day 2017) and sells or squares off the position today at the current price.

While the return on gold investment over five years would be 11%, the same for BTC is 111.7%. The returns on BTC may look attractive, but the broader crypto landscape gives us many more opportunities to extract higher alphas. If you had taken positions in BTC along with a set of promising quality altcoins, a similar trend could be seen in the same.

For example, you invest around $600, around Rs 50,000, on six good quality altcoins from the previous 5 Diwali. The same with a combination of BTC would have yielded a return of 659.624%, and a pure altcoin play would have yielded a 1207% return. The Altcoins used here in the strategy are ETH, BNB, LTC, XRP, ADA and LINK.

Thus, BTC, which is an important resource with a history of more than a decade, has also inspired many other decentralized projects and protocols, which offer a great upside potential if the right strategic positions and risk management are taken.

B) The graphs and data points below show the profit or loss (%) resulting from buying Bitcoin or Gold on Diwali for the previous year and booking positions on Diwali for the following year. Suppose a person buys bitcoin or gold on October 19, 2017 (Diwali day 2017) and sells/squares the position on November 6, 2018 (Diwali day 2018).

C)
The current state of the Bitcoin-Gold correlation

Until the market reaches its peak hawkishness, pressure on gold and other semi-investment metals such as silver and platinum is likely to persist. As investors are drawn in by a strong dollar despite rising interest rates, the correlation between bitcoin and gold has hit its highest level in 12 months.

Although Bitcoin is seen as “digital gold” and a hedge against inflation, investors are not as convinced as the yellow metal. As inflation has risen in recent months, the value of Bitcoin and gold has fallen drastically. This resulted in a correlation of an annual high of +0.4. A strong dollar and high bond yields could lure investors away from the precious metal and Bitcoin.

(The author, Palash Udhwani, is an investment analyst at Kunji.io. He regularly writes about the fundamental outlook and macroeconomic factors affecting the crypto market. You can find more research written by him at kunjiresearch.com.)