First engine: why Bitcoin is not yet a substitute for gold

The price of gold has dropped from its all-time high as bitcoin is an impressive distance from a record high. Billions of dollars are flowing out of gold as institutional money pours into bitcoin.

The narrative for some cryptocurrency advocates – and a growing chorus on Wall Street – is that investors have finally seen the light and are pulling money out of the yellow metal, an ancient hedge against inflation, and in bitcoin, the safe haven. sure of the future.

However, another explanation could be that a brighter global economic outlook means there is a little more comfort in risking money on digital assets. Rather than an apocalyptic trade, bitcoin is a sign of exuberance, in this interpretation.

While it was trading 8.5% higher since the year began, gold still fell more than 12% from its all-time high in early August, closing at $ 1,805 per troy ounce on Tuesday. A couple of weeks ago, $ 4 billion left the gold market, a record outflow, according to Bank of America. Bitcoin, meanwhile, has risen 162% since the beginning of the year.

Last week, JPMorgan analysts Nikolaos Panigirtzoglou, Mika Inkenen and Ekansh Agarwal wrote in their “Flow & Liquidity” report about the recent spike in growth of the Grayscale Bitcoin Trust, citing it as a proxy of institutional interest in bitcoin. (Grayscale is a digital asset management company owned by CoinDesk’s parent company DCG.) JPMorgan analysts wrote:

For bitcoiners, this reads like the text of the “Song of Angels”. It was another statement of the idea that cryptocurrency can compete with gold and has many advantages to be had. It was an echo of other fund managers saying similar things, like when Paul Tudor Jones II compared the two in May or when BlackRock CIO Rick Rieder said last week that bitcoin “could take the place of gold in large measure “.

Granted, bitcoin remains more correlated with gold than the S&P 500, which had a record day on Tuesday. The 90-day correlation coefficient for bitcoin and the benchmark US equity index is currently 0.26 while it is 0.38 against bullion. (A correlation coefficient of 1 means that the prices of two assets move in perfect sync; a negative figure means that they move in opposite directions while 0 means that there is no relationship between them.)

“Alternative?” Not so fast

Recent market movements seem to say something entirely different, and this appears to be related to the money flowing from gold to digital assets. Gold prices fell 5% on Nov.9, the day of the announcement that preliminary data showed a 90% efficacy rate for Pfizer’s COVID-19 vaccine. Bitcoin immediately jumped 2% on the news. Each subsequent week began with even more encouraging results from other vaccine studies, and trends show gold falling and bitcoin rising.

If the money leaves gold and goes into bitcoin, it could be because with greater optimism in the economy comes a greater willingness to enter “risky” trades such as stocks and cryptocurrencies. This doesn’t make bitcoin a safe haven game other than speculation that it could be used as a safe haven in the distant future – a nuanced difference but a difference nonetheless. This difference could be evident if another crisis hits us in the short term.

Since it’s still 2020, anything can happen.

Bitcoin is trading close to $ 19,220 after climbing 4.2% on Tuesday to close above the $ 19,000 mark for the first time since December 16, 2017. The cryptocurrency is now ahead of its all-time high of $ 19,783 reached three years ago. .

“Bitcoin at $ 19,000 is just another stepping stone to a new all-time high and the big coins in the market are gathering in turn. This is a sign that institutional money continues to pour into crypto markets, “William Noble, chief technical analyst at Token Metrics, said in an email.” ETH 2.0 will rekindle interest in the decentralized finance space and we should see the small alternative cryptocurrencies take off very soon. “

Major alternative cryptocurrencies have picked up a bid in the past few days and have outperformed bitcoin over the past 24 hours. While the cryptocurrency market leader gained over 1%, XRP and Stellar lumens increased 12% and 41% respectively. Tron and monero increased by more than 6%, while the aether is flat.

In traditional markets, optimism about potential coronavirus vaccines continues to fuel gains in venture assets. European equities are trading on a positive note, albeit with less enthusiasm, while S&P 500 futures indicated a flat opening on Wall Street. Elsewhere, gold rebounded slightly from the four-month low of $ 1,800 reached on Tuesday.