Gold and Bitcoin take different paths

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Popularity of new trading tools like CME Micro Bitcoin futures shows growing interest in bitcoin even as volatility remains high

The last time I wrote about bitcoin in April, so-called “digital gold” was trading at record highs above $ 63,000. Today, just under two months later, bitcoin has lost almost 50% of its value.

The extreme volatility of cryptocurrency has been carefully documented, but investors and financial professionals view this volatility differently depending on their position in bitcoin. Investors who have profited from bitcoin’s meteoric rise in recent years have embraced excessive volatility, while opponents and bitcoin bears point to high volatility as a burning red flag and a reason to avoid investing. . In the same two-month period that bitcoin fell almost 50%, gold appreciated 7.5%.

Bitcoin has been called an alternative to gold and, likewise, a hedge against inflation due to its limited supply and the lack of centralized regulation. Given the recent negative correlation between assets, is this still an accurate comparison or is there a more correct comparison to be made?

Different pilots

Bitcoin, gold, and other commodities derive much of their value from limited supply and growing consumer demand during times of heightened inflation and fears of government regulation. In uncertain times, investors will flock to gold and precious metals as a safe haven to stay away from government regulated currencies.

While bitcoin, gold, and other commodities are similar in that they are not tied to any system, bitcoin differs in its volatility and tendency to be driven by rumors and news. Something as trivial as Elon Musk denouncing bitcoin on Twitter was followed by significant drops in the price of the cryptocurrency. On the flip side, bitcoin hit all-time highs during the 2017 holiday season as it was a trending gift to buy for friends and family.

Bitcoin now has over 100% volatility, which should come as no surprise to investors or cryptocurrency enthusiasts who have seen the roller coaster it has taken investors over the past five years. While bitcoin and gold are not “competitors” as an inflation hedge, they could potentially be complementary in a portfolio.

New approaches to trading

This awareness of small and large investors is reflected in the emergence of new trading tools around bitcoin. Bitcoin futures have seen notable success after their launch in 2017. And in May 2021 Micro Bitcoin futures were launched as a cheaper alternative to the larger contract (1/10 of a bitcoin) which helps participants to hedge their bitcoin price risk without actually owning it. the asset. In less than two months, over a million Micro Bitcoin contracts have been traded at CME Group.

Micro Bitcoin futures trading continues to gain momentum

Asset managers have started using bitcoin in the alternative investment space as the traditional 60/40 fixed income allocation becomes obsolete. An investment in bitcoin, paired with gold and other commodities, can serve as a hedge against inflation while providing the potential for capital gains, a strategy rarely considered before when simply using the gold as a hedge against inflation. For the investor who uses gold as a buffer against traditional stocks and fixed income securities, bitcoin may not be the right solution due to its innate volatility. However, for someone looking to break away from the traditional 60/40 allocation and add diversification, bitcoin may be worth investing in.

In order to be truly competitive with gold as a “safe haven” asset, bitcoin would need to be “safe”, and the extremely speculative nature of the asset combined with now 100% volatility has shown that the leading crypto is far from being considered safe. . However, as a low correlation speculative investment, traders and investors increasingly view the digital token as a way to diversify their portfolios.

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