Middle East Turmoil: Should You Hold Bitcoin or Gold?

In case the prospect of higher-for-longer interest rates wasn’t enough to roil the stock market, now there’s conflict between Iran and Israel to worry about. As the unfortunate events unfold, investors must pause and reconsider which anti-inflation assets they plan to hold on to.

Among other things, the Middle East conflict serves as a reminder that Bitcoin is a risk-on asset, while gold is not. This helps to explain why the Bitcoin price often follows the NASDAQ while gold is less strongly correlated to technology stocks.

On the other hand, even if Bitcoin is perceived by financial traders as risk-on, it’s not necessarily any riskier than fiat money in the long run. For example, Iran’s currency, the rial, recently plummeted to a record low of 705,000 rials / USD. For comparison, Iran’s government set an official exchange rate of 42,000 rials / USD in 2018.

And of course, we can point to the debasement of the currencies of Argentina, Zimbabwe, etc., as arguments in favor of owning Bitcoin. Plus, while the U.S. dollar may be strong when compared to other fiat currencies, its purchasing power has nonetheless deteriorated rapidly since the COVID-19 pandemic.

Courtesy: @Mayhem4Markets

For those who would vigorously defend the honor of the almighty dollar, here’s a reality check. Alarmingly, the U.S. is the only G10 economy in which the most recent core inflation print surprised to the upside.

The point is that it’s fine to own some Bitcoin during times of geopolitical turmoil, especially if you’re seeking an inflation hedge and have a long-term time horizon. Besides, the Bitcoin halving/halvening event is coming up soon, and this could set the cryptocurrency’s trajectory as it only happens once every four years.

If you’re really worried about geopolitical events crashing your Bitcoin’s value, then you’re probably over-allocated. Since Bitcoin is known to be volatile (though it always seems to recover from crashes), it’s important to maintain a moderate position size.

What about gold, though? The mainstream media tends to overlook gold, except when it’s going up quickly or during times of turmoil. Right now, we seem to have an “all of the above” type of gold-bullish situation.

Indeed, it’s hard to imagine a scenario in which gold holders don’t win this year. Anyone short-selling gold futures will have to pray that the Iran-Israel conflict, along with the tensions between the U.S. and Russia and China, turn out to be a big “nothing burger.”

Courtesy: Yahoo Finance, @HODL15Capital

Beyond all else, know what you own and why you own it. Gold can move and silver can move more, but precious metals offer relative stability compared to Bitcoin. Yet, they all provide alternatives to fiat money, which involves counter-party risk.

Personally, I prefer to buy whichever one is out of favor at the moment. Yet, it’s not “too late” to buy gold, by any means. Gold rallied recently, but that was only after a prolonged period of resistance and range-bound price action.

There’s a whole lot of pent-up demand for gold, and headline risk for mega-cap stocks should only be a positive catalyst for tangible assets like gold and silver. As for Bitcoin, the immediate reaction to the Iran-Israel conflict was a sell-off, but that’s par for the course with cryptocurrency.

Really, it’s not an either-or scenario with Bitcoin and gold. It’s fine to own both in their proper proportions. Just understand their similarities and differences, and have an action plan for all possible outcomes.