Gold vs Bitcoin: Which asset has the upper hand on the other since the last five Diwali

In recent times, digital gold and sovereign gold bonds have been the preferred modes of choice for many investors, as these options take away the hassle of purchasing and storing custody of gold. While the storage and accrual of gold’s value have been digitised, another asset that’s highly transferable and has shown better performance than gold is Bitcoin (BTC).

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

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

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

Gold VS BTC performance in the past 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 purchasing Bitcoin or Gold on the day of Diwali for the corresponding year and holding the position up to the present. Assume 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 have been 11 %, the same for BTC is 111.7%. The returns on BTC might look attractive, but the broader crypto landscape provides us with 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 about $600, around Rs 50,000, across six good quality altcoins from the previous 5 Diwali. The same with a combination of BTC would have given a return of 659.624 %, and a pure altcoin play would have achieved a 1207% return. The altcoins used here in the strategy are ETH, BNB, LTC, XRP, ADA, and LINK.

Thus, BTC, being a vital asset with a history of more than a decade, has also inspired a lot of other decentralised projects and protocols, which provide huge upside potential if proper strategic positions and risk management are taken.

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

C)
The current state of the Bitcoin-Gold correlation

Until the market achieves its peak hawkishness, pressure on gold and other semi-investment metals like 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 reached its highest level in the past 12 months.

Although Bitcoin is regarded as “digital gold” and a hedge against inflation, investors don’t agree much like the yellow metal. As inflation has risen over the past several months, the value of Bitcoin and gold has drastically decreased. It resulted in a correlation at a year-high of +0.4. A strong dollar and high bond yields may lure investors away from the precious metal and Bitcoin.

(The author Palash Udhwani, is an Investment Analyst with Kunji.io. He regularly writes about fundamental outlooks and macroeconomic factors impacting the crypto market. You can find more research authored by him on kunjiresearch.com.)