Institutional capital has flooded into bitcoin to the detriment of gold. Is this the sign of a new normal?
(Image via Pixabay)
Crypto investors have a lot to celebrate as 2021 gets started. The BTC ‘bull run’ has continued unabated. If the price predictions of institutional investors are anything to go by, it won’t stop anytime soon. There are a lot of reasons for this.
Investment opportunities have expanded. In addition to futures available via the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE) and trading on popular crypto exchanges like Coinbase and Kraken, there are decentralized exchanges.
This bull run seems to have drawn capital away from gold and put it into the ‘digital gold’ of bitcoin. Could bitcoin replace gold as the go-to safe haven asset?
Gold should be performing more strongly
At its peak, gold was trading for just over $2,000 per ounce in the first half of 2020. This was driven by investors seeking a safe haven asset against economic uncertainty about the COVID-19 pandemic.
Once we hit August, however, the picture began to change and gold lost momentum. According to conventional wisdom, this was due to investors cycling back into higher-risk assets in anticipation of an economic recovery. However, there might be another explanation, bitcoin.
Gold lost momentum in mid-2020 (source: Goldprice.org)
While BTC saw steady gains from October onwards (Source: Coinmarketcap.com)
Taking a decidedly unscientific look at the performance of BTC vs Gold over the past year tells an interesting story. For the majority of 2020, BTC was holding steady at under 10K until it experienced explosive growth, beginning in late August and early September and running well into January. By contrast, gold performed strongly across the first half of 2020, only to begin losing momentum as capital was placed elsewhere.
Markets are complicated, and gold and BTC are not a zero-sum game. There were undoubtedly other factors including optimism about a COVID-19 vaccine that led to gold losing steam in the latter half of the year. However, bitcoin does appear to be muscling in on gold’s turf as a safe haven asset, and institutional capital appears to agree with this analysis.
Institutional capital believes BTC will draw investors away from gold
Bitcoin’s explosive growth didn’t come from nowhere. According to JPMorgan, it has been heavily reliant upon an influx of capital from institutional investors. This influx of capital has created a liquidity crisis, driving the price of BTC up further, and making it more attractive to institutional investors. This means that even if analysts think BTC is overvalued right now, companies will likely continue to pump money into it, propping up the price.
The capital directed at BTC has directly impacted gold. JPMorgan’s quantitative analysts believe that billions of dollars of capital will be shifted from gold to BTC over the coming years. This will create significant ‘structural headwinds’ for gold and could act as a suppressor on the price for years to come.
A key indicator of the health of BTC is the Grayscale Bitcoin Trust. The assets under the fund’s management climbed from $2bn at the start of December 2020 to over $13.1bn by late December. This is compared to outflows of around $7bn for exchange-traded funds backed by gold.
BTC gains could become a self-fulfilling prophecy
Any gold bulls in the stands may have noticed a theme here. The BTC bull-run appears to be fuelled by demand creating an artificial liquidity squeeze. If this is the case, then there is a very real risk that slow-down in capital will bring BTC crashing down, and put gold back at the fore.
Demand for BTC isn’t decreasing (Source: Coinmarketcap.com)
This is entirely possible. Indeed, it is a risk that has been highlighted by JPMorgan and others. However, this crash hasn’t yet materialized. Demand for BTC has continued to grow, and lack of liquidity has helped to sustain record prices. And the liquidity crisis is acute.
The majority of BTC is illiquid (image via glassnode)
Analysts at glassnode currently estimate BTC’s supplies at:
- Illiquid: 14.5m BTC
- Liquid: 1.2m BTC
- Highly Liquid: 3m BTC
This means that the vast majority, 78% to be exact, of BTC is unavailable to the market. This figure has risen by more than 1m BTC ($34bn) over the last 12 months. As more institutional investors enter the market with the intention of holding BTC, this supply-side crisis will become more severe, driving the perceived value of BTC even higher.
Is bitcoin better than gold?
For an institutional investor, bitcoin’s gains of over 316% during the last 12 months are attractive. However, when and if BTC starts hitting the price targets of major analysts, or around $146,000, there will likely be a slowdown of capital. Additionally, a severe shortage of BTC could lead to investors returning to more traditional safe-haven assets, such as gold.
That being said, gold still maintains one key advantage over BTC, a price floor. Gold is a physical asset, which gives it a more understandable and tangible value than BTC. In contrast, bitcoin is designed to be a store of value. In this sense, it acts more like a fiat currency, where the value is tied to trust in the backing organization (in this case the people actually investing in BTC and its blockchain technology) rather than any physical backing. This means that a major negative event, for example, a 51% attack on the Bitcoin blockchain could conceivably take the cryptocurrency to zero, if trust were completely broken.
Gold investors will also be able to find solace in the fact that gold is still outperforming the wider commodity market. Gold has grown by more than 28% in 2020 and predictions for 2021 are positive, with Goldman Sachs suggesting a price target of $2,300 per ounce. No matter what happens, gold will continue to perform strongly so long as economic uncertainty persists, and it remains a lower-risk alternative to investing in emerging asset classes such as cryptocurrency.