Market Efficency, Gold Vs. Bitcoin

According to the LA Times on March 24, “The gold market in New York is facing a historic squeeze as the global pandemic chokes off physical trading routes at the same time that investors are piling into the metal as a safe haven.” As stores, airlines, and distribution hubs brace as they face coronavirus, the gold market has been losing momentum. According to the WSJ, “As the coronavirus pandemic takes hold, investors and bankers are encountering severe shortages of gold bars and coins. Dealers are sold out or closed for the duration.”

Recently, international gold prices have been continuously declining in response to broken supply chains. According to Reuters, “The premium on CME’s Comex [New York] exchange over spot gold traded in London rose sharply again on Tuesday [April 7th] as supply routes remained partially closed and banks and brokers wary of the price gap reduced trading.” While the covid19 curves are hopefully being flattened, the differences between gold and Bitcoin have become apparent.

 As of late, gold’s price disruption has diminished slightly as “Gold Bars Are Flying 11,000 Miles to New York to Ease Supply Squeeze.” Yet as gold refineries, miners, and supply chains have been disrupted, Bitcoin’s core protocol continues to function as designed. Miners continue to mint 12.5 new Bitcoins every ten minutes on average, verifying Bitcoin’s network while edging towards its 21 million limit.

As gold miners and refineries remain dormant, Bitcoin’s international mining industry remains resilient according to hash rate measurements over the past few months. According to CoinMetrics, on April 30th, Bitcoin’s mean hash rate reached ~115 million TH/s (the measurement of mining power backing the network), which is well in the range of historic all-time-highs.

Bitcoin’s hash rate dropped a bit as the mining reward halved in May 2020. Regardless of this, mining power continued its upward trajectory soon thereafter. Regardless of price and hash rate volatility in the past, Bitcoin has continued to successfully process transactions with 99.98% uptime since its creation on January 3, 2009.

Bitcoin’s price has also been relatively resilient amid recent market volatility. In terms of 2020 returns, Bitcoin is currently outperforming both gold and the S&P 500 (although Bitcoin is significantly more volatile).

On most exchanges, Bitcoin can be deposited, traded, or withdrawn in minutes for a current median network fee of ~$0.30 (as of April 25th). In September 2019, a Bitcoin network transaction valued over one billion dollars was sent for a fee of only ~$700. The cost to internationally send an equal amount of gold during normal market conditions would be exorbitant, requiring armored transport and insurance. Today, it would be exceptionally difficult.

Bitcoin and gold production are also different when it comes to energy cost transparency. While the energy costs for gold mining and refining are opaque and difficult to measure on a macroeconomic scale (while also being exorbitant), the energy cost for Bitcoin mining is relatively transparent and easy to measure. The University of Cambridge puts this into perspective with an index estimating Bitcoin energy consumption, measuring factors such as mining hashrate, mining equipment efficiency, and average electricity cost.

Further, in terms of Bitcoin’s global marketplace and as evidence of seamless global transfer, BTC has been moving in near-perfect unison across seven global exchanges offering U.S. dollar trading pairs.

By and large, measuring closing prices across major global exchanges, Bitcoin markets have been relatively efficient amid recent macroeconomic turmoil. Contrasted with global gold markets that have been dislocated for the duration of a few weeks, Bitcoin’s major exchanges have largely maintained parity.

Compared to transporting, depositing, or withdrawing gold to exchange globally, Bitcoin is at a technological advantage. And if current market conditions continue, Bitcoin may set itself apart even further.

em out, you get the average gain/loss from transacting at the beginning of each day in July (UTC-4).