Gold Plummets While Bitcoin Skyrockets

Bitcoin has come to be the known as digital gold – a new age currency whose value cannot be eaten away by the inflationary policies of the government. The two have shown divergent trends in May, with Bitcoin's value skyrocketing and gold declining.

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Gold Plummets While Bitcoin Skyrockets

Bitcoin has come to be the known as digital gold – a new age currency whose value cannot be eaten away by the inflationary policies of the government. The two have shown divergent trends in May, with Bitcoin's value skyrocketing and gold declining.

Causes for gold's decline

Gold is viewed as a safe haven for investment during periods of turmoil and tends to go up during times of crises. Gold also acts as a hedge against inflation and tends to rise when governments follow  expansionary monetary policies.

Increasing interest rates tend to result in a fall in gold prices, because money flows from the bullion market to the treasuries market, resulting in lower demand for bullion. Gold's price has fallen below $1,200 an ounce, losing more than $100 in a month as the prospects of a US interest rate hike increase.

Wayne Gordon, ED at UBS Wealth Management, tells Bloomberg:

“The key risk for me now is not whether they will hike once, but actually whether they will hike twice. As a house, we believe they will hike twice in September and December.”

Bitcoin's thrust upwards

Unlike gold, Bitcoin's performance during the last week has been phenomenal. From $450 on 25-May, its price has increased by around 20% to $540 currently. The price increase has been attributed to increasing demand in China.

China has strict capital controls, which combined with a weakening Yuan, has resulted in people looking for ways to transfer value out of China. Bitcoin has been one of the biggest beneficiaries of this, resulting in its price skyrocketing.

Chinese investors have often shifted money between asset classes quickly in search of high returns and Bitcoin seems to be the flavour of the season. The impending block reward halving (in July 2016) which will result in a lower supply of new bitcoins hitting the market has also contributed to the positive sentiment.

Du Jin, Chief Marketing Officer at Huobi, tells The Wall Street Journal that “there’s a lot of hot money in China that has to go somewhere.”

Bitcoin – more than digital gold

Bitcoin and gold have quite a few attributes in common, the chief being limited supply and being difficult to counterfeit. This is the reason why Bitcoin has been referred to as digital gold.

However, unlike gold, bitcoins can be transferred across the world at a negligible cost. Import curbs and check-posts cannot stop the movement of bitcoins across national borders.

These attributes are the key reasons why Chinese investors have turned to Bitcoin rather than gold at this point in time.

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