Outlook April Cryptos – Bitcoin Taking the Gold

LAGOS (Capital Markets in Africa): The adage that money flows to where it’s treated best describes what we see as firming underpinnings for the price of Bitcoin. It’s not necessarily bearish for gold, which is backing into layers of support below $1,700 an ounce, but most indicators show a shifting global tide that favors the nascent digital currency as a reserve asset. 

1. Digital vs. Analog: Bitcoin’s Upper Hand
Bitcoin’s relationship to gold is similar to 2016, when the metal peaked just below $1,400 an ounce and the crypto launched toward its 2017 peak. A key difference this time is that Bitcoin is rising in value and less speculative, underpinned by greater adoption. It was the world’s largest automaker by market cap (Tesla) announcing the diversification of some of its equity wealth into the crypto that allowed Bitcoin to breach $40,000 resistance. Our graphic shows the upward-sloping four-quarter moving average just below $40,000, indicating its transition to support. Gold exchange-traded-fund holdings have peaked with a velocity of decline similar to the 28% price drop in 2013. Juxtaposed is Bitcoin gaining mainstream adoption and a strengthening foundation from volatility reaching new lows vs. gold in 2020 

2. 2020 a Strong Foundation for Bitcoin vs. Gold
Volatility and ETF flows indicate the Bitcoin price is in the early days of appreciating vs. gold. Our graphic shows two milestones from 2020 in support of a rising ratio — 260-day volatility on the crypto reached the lowest ever vs. the metal, and gold ETF holdings peaked from a record high. Similar conditions in 2016 preceded Bitcoin’s breakout from 1-to-1 vs. the per-ounce price of gold. About 10x in this ratio held resistance until December. In addition to plenty of maturation potential for nascent Bitcoin, the crypto has a clear edge that should further pressure its volatility vs. gold’s — Bitcoin supply is fixed. Mainstream adoption and higher prices are increasing depth, which suppresses volatility and risk measures.

3. Ballooning Publicly Traded Crypto Assets
Akin to looking back at 2020 as an inflection year for mainstream adoption of Bitcoin, we see rising potential for 2021 to mark a migration milestone into traditional investment portfolios. Publicly
traded cryptocurrency funds’ assets, dominated by Bitcoin, have surged to almost $60 billion as of March 25 from less than $10 billion in October. Growth has been driven by both rising inflows and skyrocketing prices for the funds’ underlying holdings. A U.S. Bitcoin ETF, on the back of recent launches in Canada, would likely accelerate expansion. We see a rising tide from institutions and individual investors lifting Bitcoin. It appears the narrative has tilted toward allocating a small portion of assets toward the crypto vs. the risks of missing out on the potential for Bitcoin becoming the global benchmark digital asset. 

4. Bitcoin Leaving Exchanges a Sign of Demand
Markets are about buyers vs. sellers, and Bitcoin risks lean toward further price appreciation, if the amount of the crypto readily available to trade is a guide. Our graphic depicts the percentage of
Bitcoin held on exchanges well below the peak from 2020, which marked a selling extreme. The patterns in this dataset from Coinmetrics suggest the Bitcoin price will gain elevated risk of sellers
dominating buyers when the amount of the crypto held on exchanges exceeds the previous high. That’s what happened around the price high in 2017. The 2015-17 bull run peaked around the time more Bitcoins were moved back on exchanges than the previous high from 2016. Our takeaway from this metric is that buyers are taking Bitcoins off exchanges and moving into longer-term storage, some earning interest. 

5. Digital Gold Pushing Aside the Old Guard
Gold will always have a place in jewelry and coin collections, but most indicators point to an accelerating pace of Bitcoin replacing the metal as a store of value in investor portfolios. Bitcoin’s
fundamental and technical underpinnings are improving while gold’s deteriorate. Our graphic depicts total known gold ETF holdings peaking at about the same time Bitcoin 180-day volatility
reached the lowest ever vs. the metal in November. The breach of the 10x Bitcoin to an ounce of gold ratio is similar to when the 1x threshold was exceeded in 2017. Gold is fighting a battle with Bitcoin, which can earn 6-8% in crypto savings accounts and is well on its way to becoming a global reserve asset in a digital world. Rising real yields are a headwind for gold prices, but less so for Bitcoin, still in its price-discovery stage.

Source: Bloomberg Business News