Bitcoin is nearing a psychological tipping point, gold parity. Its price has been accelerating in the past few days, increasing by $100 in just over 24 hours. Meanwhile, gold has fallen by $200 this quarter, currently standing at $1,134.45.
There appears to be a strong inverse correlation between gold and bitcoin from September to now, with bitcoin gaining $300 while gold has lost $200. The reasons for this inverse correlation are not fully clear.
Gold usually performs well in times of uncertainty, as is often the case with bitcoin, but it may well be that gold’s price is more affected by America’s stock market which has considerably increased this quarter as major investors, usually in the West, may run to gold when the stock market crashes and then slowly re-invest their funds back to dividend providing stocks as confidence increases.
Bitcoin, on the other hand, might be somewhat more global with its price affected not just by events in the west, but also other parts of the world, such as China, India, Venezuela, Brazil, Nigeria. Moreover, Bitcoin’s easier reach for small investors in developing countries who might not even have a bank account, combined with its added function as a currency, might provide shelter both in times of uncertainty and when the economy is considerably growing.
In contrast, Gold’s function as solely a store of value might be useful only when times are tough, potentially incentivizing gold holders to diversify their funds towards bitcoin, especially when the latter seems to be rising, creating a self-enforcing loop whereby the more gold’s price falls while bitcoin’s rises the more gold holders diversify.
Bitcoin has never reached gold parity. It came very close in 2013, but failed to do so by about $50. Whether it will this time remains to be seen, but if bitcoin maintains gold parity or above, then the digital currency will be nearing a tipping point as it establishes a value higher than gold itself, potentially slowly causing a domino effect.
Gold’s market cap would remain far higher, but if bitcoin maintains above parity, its added function as a currency might change calculations and slowly make it the preferred choice for investors as they can physically hold actual bitcoins, rather than paper gold, and easily move them without any intermediary, providing an added function of an excellent medium of exchange on top of store of value.
This would be the second likewise milestone for bitcoin. The first was reaching dollar parity back in 2011, a historical and very significant event at the time which led to increased confidence, media attention and awareness, quickly sending the price to $32, before crashing due to a hack of the now defunct MT Gox bitcoin exchange.
Likewise, reaching gold parity would be a historical event for it would be the first time a currency is valued as much as gold itself by the free market. A currency which, unlike gold, performs all functions of money: a store of value, an excellent medium of exchange and, albeit at a very small scale, a unit of account.
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Last modified: May 21, 2020 10:10 AM UTC