Why is bitcoin outperforming gold during this bull run?

Institutional capital has flooded into bitcoin to the detriment of gold. Is this the sign of a new normal?

bitcoin gold

(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. 

Demand is also growing: ICE has reported record trading volumes and retail commodity brokers, known for making trading easy for novices to learn, are reporting the same

Institutional investment has also risen sharply with continued growth expected on the horizon. But there’s more.

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. 

bitcoin gold

Gold lost momentum in mid-2020 (source: Goldprice.org

gold bitcoin

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. 

gold bitcoin

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

bitcoin gold

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.

The Future Of Work: Are Your Skills Up-To-Date?

Professionals, no matter the career, need to keep their skills up-to-date so they can compete with others on the same path. An essential skill nowadays is tech-savviness. But, if you want to be even more prepared, you should consider retraining and entering a tech profession. Here is why.

Why You Should Learn Tech Skills
It is not a secret that technology has taken over many aspects of our lives, including our house, workplace, entertainment, and much more. With new developments, this will only continue to grow. The first benefit of learning a tech skill is that you will have work opportunities no matter what. It is almost impossible to envision a future without technology.

Another thing is that automation and new technologies are replacing some jobs that humans used to do. They are expected to eliminate professions like customer service and even drivers. Accordingly, the second benefit is that you won’t run the risk of your profession disappearing, at least in the next decade.

Tech skills are also easy to learn because you don’t have to go to university to learn them. You can attend online courses or coding bootcamps, or even study on your own using free resources on the web. On top of all this, the tech industry has some of the highest salaries and incredible benefits and perks. If you are considering retraining for the future of work, tech skills are the route to take.

Data Science
This tech skill is one that needs a high technical level. If you are good at math and statistics, then this may be the correct choice for you. Some of the main responsibilities of data scientists include wrangling data, creating A/B testing models, and designing artificial intelligence algorithms.

These professionals have become in high demand because of data. Everything we do on the Internet generates data. The same goes for everything we do with our smart devices. Data scientists help businesses analyze that data and generate powerful insights that lead to more revenue.

Anyone can learn to be a data scientist, even if they don’t have a technical background, in which case they simply have to put more effort into learning the concepts. Flatiron School offers a complete course to become a data scientist.

Machine Learning Engineer
Machine learning a type of artificial intelligence to program computers and machines to learn. These engineers create models that train the machine. Later, the computer can respond to new data on its own. It is being used in different industries to automatize processes and operations.

For example, in healthcare, many scientists are exploring AI technologies to save lives. They already use machine learning to create an algorithm capable of detecting malignant breast cancer with 99 percent accuracy.

This career also requires some math and statists knowledge, but nothing that you can’t learn. If you want to make an impact in the world, this is probably one of the best technologies to learn right now. You can also become a machine learning engineer with a coding bootcamp or online course. It depends on the company, but most tech giants accept professionals without a bachelor’s degree as long as they prove their skills.

Software Development
Software development is the process of designing, deploying, and maintaining programs, applications, and software in the devices we use every day. Software developers create operating systems that make possible the use of our smartphones and computers. They also develop programs like Microsoft Office and Photoshop.

It is obvious why this skill is in high demand. Many companies even outside of the tech industry need these professionals. Software development is also one of the most popular skills for remote work. You can learn with Coding Dojo’s software engineering course. You can also try out some free courses first to know if is something you like.

Blockchain Literacy

Blockchain is the technology behind cryptocurrency. This technology started with Bitcoin but now has a lot more applications than just cryptocurrencies. Blockchain has the potential to improve security in almost all aspects of online platforms. Everyone should learn how this technology works.

You can start by learning the basics like what is blockchain and how it works. Then move to other concepts like decentralized apps, ledgers, and public and private keys. You can also read about some real applications of these technologies in different industries. Blockchain will be part of our future and it is important to understand it.

For further resources up-to-date , listing the top seven courses where you can learn the fundamentals of blockchain technology for free from edX, Coursera, Udemy, and Pluralsight check out this article from Java programmer Javin Paul.

Guest post from Artur Meyster (Twitter / LinkedIn), who is the CTO of Career Karma (YC W19), an online marketplace that matches career switchers with coding bootcamps. He is also the host of the Breaking Into Startups podcast, which features people with non-traditional backgrounds who broke into tech.