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It’s Time to Retire the “Bitcoin as Digital Gold” Analogy

It’s Time to Retire the “Bitcoin as Digital Gold” Analogy
By Vin Narayanan
Date October 7, 2022

Crypto Market Musings

  • As of this writing, bitcoin is up about 3% over the last seven days and trading around $20,000.
  • Ethereum is up about 2% over the last seven days and trading around $1,358.
  • There’s no Fed meeting this month, so we won’t have to worry about interest rate hikes until the beginning of November. So a pair of key indicators will drive both the crypto and equities markets instead: 
    • If today’s job report shows too much growth in either jobs or wages, look for the markets to tank.
    • The next release of Consumer Price Index data is set for October 13. That will show us how inflation is doing and help determine whether the Fed will continue to aggressively increase interest rates.
  • Nobody knows for certain when this bear market will bottom out. But crypto has been far more resilient than many so-called experts expected. That’s a positive signal. The next crypto bull market — whenever it begins — could be a doozy.

What Vin Is Thinking About

Bitcoin is often described as digital gold. The analogy, on a superficial level, makes sense. Part of what makes gold valuable is scarcity. The same applies to bitcoin.

Many have suggested that bitcoin and gold prices could eventually mirror each other because they serve the same purpose — a hedge against inflation or an alternative store of value. Intuitively, that makes sense. But the reality has been very different. And as investors, we should be thankful for that.

Bitcoin just hit its highest correlation level with gold in the last 12 months at 0.4. The 0.4 correlation coefficient indicates that the two assets have a very slight correlation right now — and nothing more. (Say it with me now: correlation is not causation).

Now, let’s take a look at the 10-year price chart for gold.

Is this something we really want bitcoin to be correlated with? Let’s end the digital gold analogies for now. They don’t really work. And we don’t really want them to work.

And Finally…

I have no idea if Elon Musk will end up buying Twitter or not. Negotiations have hit another snag. I do know that if the deal goes through, we better get ready for a bunch of dogecoin tweets.

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