Cryptocurrency is “digital gold”? Goldman Sachs disagrees: Instead, it’s more like a substitute for copper

Bitcoin is more like copper in terms of inflationary logic?

Author: Xiaoxiang

While many cryptocurrency fans often refer to cryptocurrencies like Bitcoin as “digital gold,” Jeff Currie, global head of commodities research at Goldman Sachs, believes that cryptocurrencies are more like copper than a substitute for gold in terms of hedging against inflation.

Currently, as the global economy gradually recovers from the crisis of the new crown epidemic, inflation data is climbing, especially the ultra-conventional easing policies of central banks, resulting in a number of areas are experiencing an oversupply of demand. Core PCE price data released by the Federal Reserve on Friday rose sharply by 3.1% from a year earlier, far exceeding the Fed’s 2% inflation target.

The rise of the reflation trade this year has triggered volatility in a range of correlated assets. And among them, the performance of gold and cryptocurrencies has certainly been particularly noteworthy. Both were once seen as hedges against rising prices, with cryptocurrency bulls once claiming that bitcoin was a modern alternative to gold.

But the two have clearly shown no resemblance to each other over the course of the year. Gold prices, while sluggish in the first quarter, have gained nearly $200 since the beginning of April and are now near four-month highs, driven by a weaker dollar and rising demand due to rising inflation expectations. Cryptocurrencies, meanwhile, have shown recent declines despite their sharp spike during the year. Bitcoin, for example, has fallen more than 25% in the past three months, even though it is still up more than 25% year-to-date.

In some ways, bitcoin’s trend is more similar to that of copper, which also surged to an all-time high in mid-May before falling sharply near the end of the month.

Cryptocurrency is "digital gold"? Goldman Sachs disagrees: Instead, it's more like a substitute for copper

Bitcoin is more like copper in terms of inflationary logic
Generally speaking, the purpose of hedging against inflation is to protect investors from rising prices that lead to a decrease in the purchasing power of the currency. And according to Goldman Sachs’ Currie, investors can break this down even further, which may demonstrate why cryptocurrencies should not be seen as a substitute for gold, but rather as more of a copper substitute.

You can take a good look at the correlation between bitcoin and copper, or the correlation between risk appetite indicators and bitcoin, which has been around for more than a decade – it’s definitely a risk-on asset,” Currie said. Bitcoin and copper are both risk-on inflation hedges, while gold is seen as a risk-off asset.

Currie further pointed out that “inflation has a good side and a bad side. Good inflation is the result of demand pull, and that’s when people tend to hedge with bitcoin, copper and oil.”

“Gold, on the other hand, is a hedge against hyperinflation. Current market supply is diminishing, mainly focused on shortages of chips, commodities and other types of raw materials. That’s why people will want to use gold as a hedge right now.”

Commodities are a more effective hedge against inflation than the stock market
Goldman Sachs also said in its latest report released Monday that commodities in general remain the best choice for investors to hedge against inflation risk.

The commodities research team led by Currie noted in the report that stocks are a good hedge against “expected inflation” because they are an estimate of profitability and growth. However, once inflation expectations become imminent, so that the central bank may be forced to raise interest rates, the stock market is no longer as useful as an inflation hedge.

Commodities are spot assets that do not depend on forward growth rates, but on demand levels relative to current supply levels,” the report said. Commodities can therefore be a hedge against unexpected short-term inflation, which tends to arise later in the business cycle when aggregate demand exceeds supply.”

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