Bitcoin vs. Gold: How the 2024 Halving Shifts the Inflation Dynamics

With only a couple of days to go until the 2024 Bitcoin halving, analysts are forecasting a significant shift in the cryptocurrency’s economic model. This shift will see Bitcoin’s inflation rate—the rate at which new bitcoins are added to circulation—decline to levels lower than those of gold, traditionally the standard-bearer for low-inflation assets.

This development prompts a closer examination of what this means for Bitcoin, for gold, and for investors considering the future landscape of digital and traditional assets.

Understanding the Halving

Bitcoin’s halving is an event hardcoded into its blockchain protocol, occurring approximately every four years. It effectively reduces the reward that miners receive for verifying transactions and adding new blocks to the blockchain by 50%. The next halving, expected on April 18th, will decrease the Bitcoin reward for miners from 6.25 to 3.125 bitcoins per block. This mechanism controls the supply of bitcoins and mimics the scarcity dynamics of precious metals, thereby insulating the currency against inflation.

Bitcoin’s Inflation Rate Post Halving

Currently, with each block taking about 10 minutes to mine, the Bitcoin network generates approximately 328,500 new bitcoins annually. Post-halving, this number will drop to about 164,250 bitcoins a year. By the time of the halving, the total circulating supply of Bitcoin is projected to be close to 19.7 million—out of a maximum of 21 million. This sets the stage for a post-halving inflation rate of approximately 0.83% per annum.

Gold Vs Bitcoin: Inflation Rate Comparison

In contrast, gold, which has been a symbol of stability and a hedge against inflation for centuries, sees its total above-ground stock grow by about 1% to 1.5% each year, due to new mining output.

Global annual gold production has been consistent for decades. Source Barchart

The production and addition of gold to the global market are influenced by a combination of factors including mining technology, geological availability, market demand, and various economic variables. Despite these fluctuations, the gold supply inflation rate has remained remarkably steady, reinforcing its role as a “safe haven” asset.

Post-2024, Bitcoin’s expected inflation rate of 0.83% will undercut even the lower boundary of gold’s annual inflation rate. This marks a significant milestone for Bitcoin, transitioning from a highly volatile investment to a more stable store of value—a quality long associated with gold.

Bitcoin – Finally The New Safe Haven?

This emerging dynamic prompts the question: could Bitcoin assume some of the safe haven characteristics traditionally held by gold? While Bitcoin’s journey has been marked by high volatility, its capped supply and decreasing inflation rate are features that align well with the criteria for a safe haven asset during times of economic uncertainty.

However, the narrative that Bitcoin behaves as a “safe haven” asset like gold has been a topic of much debate within financial circles. To assess whether Bitcoin and gold are correlated, several factors and perspectives need to be considered:

Price Behavior and Correlation

• Volatility: Bitcoin is known for its high volatility compared to traditional safe haven assets like gold. This volatility stems from various factors including market sentiment, regulatory news, technological developments, and macroeconomic factors that do not typically affect gold prices in the same manner.
• Market Dynamics: The market dynamics of Bitcoin are considerably different from those of gold. Bitcoin’s market is relatively young, having been around since 2009, and it experiences large swings in price due to its nascent industry status and speculative interest. Gold, by contrast, has been a recognized store of value for millennia and is integrated into various sectors such as jewelry and electronics, in addition to its investment attributes.
• Reaction to Economic Stress: Gold has historically risen in times of economic uncertainty or inflation since it is considered a tangible asset with intrinsic value. Bitcoin, sometimes referred to as “digital gold,” has had instances where it has increased in value during times of market stress, but its reaction to such events is less consistent. For example, during the initial months of the COVID-19 pandemic, Bitcoin initially fell sharply in March 2020 before recovering and eventually starting a significant bull run, whereas gold displayed more consistent growth during the same period.

Statistical Correlation

• Empirical Data: Over the last five years, statistical analyses show that the correlation between Bitcoin and gold is generally weak. There are periods of slight positive correlation, particularly during times of heightened market stress, but these are not consistently maintained.
• Correlation Coefficient: The correlation coefficient between Bitcoin and gold fluctuates, typically ranging from slightly negative to mildly positive. This indicates that while both assets can sometimes react similarly to certain macroeconomic stimuli, their price movements are not strongly aligned.

Narrative vs. Reality

• Investor Perception: The perception of Bitcoin as a safe haven may be driven more by narrative and investor sentiment than by fundamental attributes. While some investors treat Bitcoin as a hedge against inflation and currency devaluation, similar to gold, this usage is not universally accepted or observed in market data.
• Market Maturity: Bitcoin’s market is evolving, and its role may also change over time. What it is today could be different in the next decade, potentially aligning more closely with traditional assets or carving out a unique niche.

Conclusion

Based on empirical data from the last five years, the narrative that Bitcoin should be correlated with gold as a safe haven asset does not hold consistently. While there are similarities in how both assets can be perceived as hedges against certain risks, their market behaviors and underlying fundamentals differ significantly. This makes Bitcoin a unique asset class, distinct from traditional safe havens like gold.

As we approach the 2024 Bitcoin halving, the anticipated drop in Bitcoin’s inflation rate below that of gold represents a watershed moment for the cryptocurrency. While it is premature to predict whether Bitcoin will ever match gold in terms of market stability, the halving event will undoubtedly play a crucial role in Bitcoin’s maturation as an asset class. Investors and market watchers would do well to pay close attention to these developments, as they will not only influence the trajectory of Bitcoin but also potentially redefine what constitutes a safe haven in the digital age.