Shuli Ren, Bloomberg
The prospect of Kevin Warsh as the next chair of the Federal Reserve may have sapped the appetite of those trading on a sugar high. But what remains unbroken is the investing world’s curiosity about alternative assets. Investors will continue to ditch Bitcoin for gold as they hedge against inflation risks.
It’s clear from recent price actions that both Bitcoin and gold are products of global liquidity conditions. After news broke that Warsh, the most hawkish among a short list of candidates, is poised to head the Fed, gold had its worst day in more than four decades on Friday, and continued to slide during Asia hours on Monday. Over the weekend, Bitcoin tumbled below $76,000, resisting levels seen during last April’s selloff.
But there’s a key difference between the two. In January, gold rallied while Bitcoin languished as global investors sought alternatives to US dollar and debt. The very public hype that the “digital gold” might emerge as an alternative reserve currency did not pan out at all.
Why was gold outperforming Bitcoin? One theory, according to Michael Howell of GL Indexes, is that while the Fed has a bigger impact on cryptocurrencies, the People’s Bank of China dictates where gold is heading. As Howell puts it, not all liquidity is equal — where it originates and how it circulates has critical asset-specific effects.
In simpler terms, a debasement trade is also occurring in China. Not able to buy crypto, Chinese households have to purchase gold so that the government doesn’t erode their savings.
By some measures, liquidity conditions are even easier in China. Money supply has been growing at over 8%, well above that of the US. As a result, China’s thrifty households have witnessed a collapse in deposit rates. While a 5-year time deposit could have yielded as much as 5.3% in 2021, you would be lucky to get 2% these days.
Going forward, this divergence in liquidity conditions may become even wider. While Beijing is seeking to stimulate a slowing economy, Warsh’s very public criticism of the Fed’s balance sheet expansion in the past is igniting worries that he could move quickly to have the central bank draw it down, thereby raising borrowing costs in the US.
Coming into 2026, millions of Chinese will have to think about how to protect their wealth. Banks have cut their deposit rates seven times since 2021 to protect their profit margins, and trillions of yuan worth of higher-yielding products will be due this year. If some of that cash ends up in gold, the precious metal’s sharp selloff in the last few days will only be a healthy correction, not a structural downturn.The same can’t be said for Bitcoin, however.
Here is the irony with those believing in the debasement trade. Many have lost faith in traditional safe-haven currencies, railing against irresponsible fiscal borrowing and never-ending quantitative easing. But when they search for non-traditional investments, they still have to follow the traditional money trail. They can’t shake off the gravitational pull.
In this case, China is where a lot of new money is being printed, and gold, which the central bank has been avidly purchasing since Russia’s invasion of Ukraine in 2022, is emerging as the best alternative to challenge the dollar’s reserve currency status. As for Bitcoin, a harsh winter has arrived.
[Abridged]
Courtesy Bloomberg/Shuli Ren
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