Bitcoin Breaks the Elusive $10,000 Barrier

Bitcoin prices have been trading close to the elusive $10,000 level for months. The price came close in early February, only to stall. At the time, Joe PiPasquale, hedge fund manager at BitBull Capital, noted that Bitcoin is stuck in a resistance zone. In recent months, gold has risen to new all-time highs. Why did Bitcoin have to struggle?

Early this year, investors in digital assets were all excited over the many billions of dollars that were being injected into the economy by the U.S. central bank. The money was injected in response to the global recession caused by the emergence of COVID-19. At the time, investors thought that the flood of dollars would lead to inflation, which, in turn, would accelerate gold prices. Gold has always been seen as a hedge against unchecked inflation. Bitcoin, tagged as “digital gold” by some, was looked at in the same vein due to the limited supply.

Although the coronavirus is still with us, and might be for some time yet, market gyrations have settled down. Why then has bitcoin lagged behind gold, a fact that has frustrated investors.

Gold Prices have Surged

During the week of July 20, gold mimicked its all-time high of $1,891.90 per ounce, a price last seen in 2011. Bitcoin meanwhile, is stuck in the same narrow trading range that it has been in since April. However, finally, bitcoin has broken through the $10,000 level, rallying to within $50 of $11,000.

According to some investors, Bitcoin is far less mature than is gold. It is suggested that this may be an underlying reason why bitcoin has yet to develop credibility as a hedge against inflation. Charles Morris, the founder of Byte Tree Asset Management, said that “The inflation sensitivity of bitcoin has never been tested in the years since inception, as in this period, there has never been sustained price pressures.”

That statement represents a shift from what was being said only a few short months ago. At that time, the bullish hype over Bitcoin was so universal that any reservations about its limited trading history or limited market size were crowded out. Now all of a sudden, there is no shortage of warnings explaining why Bitcoin has not met the same inflationary expectations that are buoying gold.

Bitcoins Initial Rise

As inflation expectations ticked upwards, Bitcoin initially followed suit. The move from a low of $3,867 to $10,000 that was seen up through mid-May was perhaps fueled more by a bullish narrative that surrounded the May halving event. Since then, little has happened. Bitcoin has languished in the $9,000 to $10,000 range, even though inflations expectations continued to haunt the market.

From 1974 through 2008, inflation in the United States, measured by the consumer price index, rose on average, 5 percent per annum. During this period, gold rose 15 percent in real terms. It was not until the 2008 crash that gold rose in price from $850 to $1,920 per ounce. Gold has a history of being a hedge against inflation. Bitcoin has yet to prove itself.

Since Bitcoin’s entrance onto the investor stage in 2009, the economic environment has enjoyed relatively low inflation. Since 2014, inflation has hovered between zero and 0.8 percent, well below the 2 percent target set by the Fed.

Gavin Smith, CEO of Pandora, a cryptocurrency hedge fund, suggests, “Gold is akin to a tanker, while Bitcoin is more like a speedboat.” He went on to say that in four or five years, based on the trajectory of both gold and bitcoin, both were an inflation play.

It is still fair to say that nothing is up the same extent as is gold, but after bitcoins rise, only time will tell if the process has just started, or will it fizzle out?