Gold has successfully reached a historic high of $2500, and when adjusted for inflation, the price of gold has yet to reach the gold trading price in January 1980, but it is challenging this level. The pricing power of the Fed's dovish interest rate cuts, combined with the warning signs of a tech stock crash, market analysis believes that once the bubble bursts, gold will hold its bid, but bitcoin will collapse as it is no longer seen as a safe haven asset.

According to Wolfgang Münchau, columnist for DLNews, co-founder and director of Eurointelligence, the price of bitcoin has risen much higher than the end of 2022, but there is a difference between the steady rise in the price of gold since 2000 and the sudden surge in the price of bitcoin.

(Source: DLNews)

"The difference is, if investors are concerned about financial instability, they will turn to gold. Bitcoin is a ultimate risky investment with characteristics of a tech asset," he explained.

Furthermore, Wolfgang stated that bitcoin is not a hedge against devaluation or a hedge against the tech bubble. Several top investors, such as Warren Buffett and George Soros, have recently announced that they have exited certain areas of the tech industry.

Hedge fund Elliott has warned that the AI boom is speculative, especially for NVIDIA's stock price. Wolfgang generally agrees with this assessment, stating that "AI has entered a bubble territory."

Exploring the reasons, Wolfgang believes that this revolution will not stop the long-term decline in Western productivity growth. The United States has successfully reversed the trend of slowing productivity growth, but if we exclude the tech industry, there is not much difference between the United States and Canada or Europe.

The productivity miracle of the tech industry is related to the stock market providing cheap capital for the industry. When this flow of funds ends, it is expected that the productivity gap between the United States and Europe will narrow. If productivity growth slows down, why would company profits remain high? Based on current valuations, that's what they think. In the long run, you would expect them to be the same.

There are multiple ways to look at Gross Domestic Product (GDP), one way is to see it as the sum of all profits and all wages. For most of this century, profit growth has exceeded GDP growth, and therefore also exceeded wage growth, because political and demographic structures favor business profits.

This situation is changing now. Until the last century, the price-to-earnings ratio of the S&P 500 index fluctuated slightly between just under 10 and 20. That was a period of relatively high productivity. The current P/E ratio is 26, and the Nasdaq index is 40. If long-term productivity growth declines, it is hard to imagine how these valuations can be sustained.

The extremely high valuations of technology stocks and crypto assets are based on extremely optimistic assumptions about future earnings growth. Cryptocurrency technology brings hope for financial innovation, but it may take another 10 or 20 years to be related to the macro economy. AI will undoubtedly impact people's lives. But whether it's the beautiful imagination about AI or the alarming stories, both are exaggerated.

AI chatbot ChatGPT is very useful for technical tasks, especially programming, but seems to be of little help for journalism. Wolfgang recalls the past, he still remembers in 2017, when everyone predicted by now we would have self-driving cars? It’s still many years away from that utopia. If lucky, we might have cars driving automatically on highways within 10 years.

So what would happen to Bitcoin if the market crashes?

He responded in the article: "Of course, Bitcoin has inflation resistance just like gold, even stronger than gold. Gold faces supply risks. Central banks of various countries may release a large amount of gold reserves to the market. Or new gold may be found. But there won’t be new bitcoins, no supply shock."

"Unfortunately, that doesn’t solve the problem. Currently, Bitcoin's fate is intertwined with the fate of the technology industry. Many investors see cryptocurrencies as part of their technology investment portfolios. Cryptographic assets, especially Bitcoin, have acquired traditional investment characteristics over the years through exchanges, stablecoins, and spot ETFs."

Looking at the precious metals market, gold is at the other end of the investment portfolio, a safe and boring part. Wolfgang emphasizes: "People generally do not invest in gold to make big money, the behavior of gold investors is more like a 'cult.' Always wondering why so many elderly male gold enthusiasts wear bow ties, they are a strange group of people."

The world of cryptos also has many strange characters, but it is completely different from gold. The same applies to the way they react to a bubble burst. In this case, liquidity will be drained from the system. Traders will be eager to meet the requirements for additional margin.

Wolfgang further points out, "The financial world is no longer as fragile as it was in 2008, but I believe that the expected scale of a tech stock crash will become a root cause of financial instability. Therefore, when the market collapses, it is expected that bitcoin will also collapse. But bitcoin and other cryptos will eventually recover, and some (but not all) of the currently soaring tech stocks will also recover."

The reason why he is optimistic in the long term is that cryptos and gold have an important similarity: scarcity makes them a safe long-term investment.

Even though most investors don't see bitcoin that way now, it is indeed the case.

A few years ago, the author didn't accept the idea that scarcity has intrinsic value and felt that it needed to be connected to something else, such as industrial use, aesthetic value, or in the case of gold, a consensus that has stood the test of time, that it has value in itself.

Today, Wolfgang has changed his mind on this point. In a world where central banks expand their balance sheets without consequences and governments turn their currencies into geopolitical weapons, guaranteeing scarcity itself has value.

He concludes, "But this is long-term. If the bubble bursts in the next year or two, I believe that bitcoin will collapse along with it, while gold will not."