Since the emergence of bitcoin ETFs following regulatory approval in January, the asset class has seen prices surge to more than US$72,000 by the middle of March 2024, much to the glee of enthusiasts.
Inflows to these ETFs have surpassed $5 billion, flowing to large fund managers which, among others, include BlackRock, VanEck, and Fidelity, listed on the New York Stock Exchange, Cboe, and the Nasdaq.
Observing the trend, crypto and digital-asset focused asset manager, Magnet Capital, said the performance of bitcoin in the first quarter of 2024 has “probably exceeded everyone’s expectations”.
“[The launch of bitcoin ETFs have] marked a point in time in which a lot of institutional allocators can consider bitcoin for the first time within their investable universe; that has opened the doors to a potential flight of capital coming into this market that historically wasn’t able to,” explained Benjamin Celermajer, director at Magnet Capital.
“What’s eventuated is an insatiable demand from Wall Street and we see that every single day, where even for the last two weeks, the average inflow to these bitcoin ETFs has been circa $400 million every trading day.
“That’s a huge amount of demand persistent within this market, given bitcoin, by definition, has an inelastic supply curve and a big change to demand like that does fundamentally rerate what price bitcoin trades at.”
Celermajer is among those that view bitcoin as a kind of digital gold – an argument that has come to the forefront of cryptocurrency discussions in recent months.
Outlining similar characteristics between the two assets, he explained: “Granted, bitcoin is a lot younger – gold has been traded for centuries while bitcoin is only around 15 years old – so it’s a nascent asset.
“But, given the characteristics and the institutional validation seen recently from the likes of BlackRock, Fidelity, and Franklin Templeton putting their names to these assets now as digital gold, it really starts to create the global perception that there’s something here.”
For historical allocators who might have previously considered gold, this changing perception could lend weight to considerations for other asset classes that can sit harmoniously within a portfolio, he suggested.
“While there certainly is a bit of competition in portfolio allocation, there’s only a certain amount of dollars within a portfolio and only a certain amount of that would go to non-sovereign assets which probably, historically, has fallen into gold, now allocators have the opportunity to [consider bitcoin],” Celermajer told InvestorDaily.
Even small allocations to bitcoin can contribute significantly to a portfolio, which has been demonstrated in the past, he added, terming the cryptocurrency “a series A version of gold”.
“If the trend continues where bitcoin is receiving allocations that may have historically gone to gold, gold may not perform as anticipated.
“You see this dynamic coming to the market where it’s too early to definitely say gold outflows are going to bitcoin, but you can imagine a scenario where people are reallocating portions or their entire gold portfolio into a digital version – which is bitcoin.”
AMP’s chief economist, Shane Oliver, said that bitcoin’s resilience, coupled with the utility of blockchain in smart contracts and decentralised finance, indicates that bitcoin and cryptocurrencies may not merely be seen as another bubble.
“However, the question remains that if bitcoin is not really digital cash and it’s not a capital asset suitable for normal valuation, what is it? The short answer is that it’s something to speculate on,” Oliver stated.
“The strongest argument for its existence is that it’s a digital version of gold and is displacing some of the demand that would have gone into gold. For millennia there has been demand for precious metals, like gold. While gold has a fallback use as jewellery, its use for this does not explain movements in its price. Rather, it has value because enough people have faith in it as a store of wealth which is independent of government – and people buy it not because they see jewellery demand going up but if they believe someone will pay a higher price for it.”
Bitcoin shares similarities with gold in terms of its limited supply and independence from government control, although it lacks the tangible nature and fallback of jewelry demand, according to him.
Mulling over arguments of bitcoin as a hedge against inflation, Oliver noted bitcoin’s value plummeted nearly 80 per cent in 2022 amid surging inflation.
But, he said, gold has also failed at various points and investors have not lost faith.
“Bitcoin’s rising sensitivity to movements in interest rates suggest it becoming more gold-like as rising rates increase the opportunity cost of holding gold or bitcoin and vice versa for falling rates – like now, which has pushed both to record highs,” he said.
“If bitcoin is digital gold, it could have lots more upside as younger digital savvy buyers favour it over gold. Rough estimates suggest that if bitcoin were to approach, say, 25 per cent of the market value of gold, its price could rise to US$160,000.”
Bitcoin ‘not a substitute for gold’
Global X senior investment strategist David Tuckwell dismissed the notion of competition between gold and bitcoin as “categorically false”.
He noted that while many in the bitcoin community see structural similarities between the two assets, this does not necessarily imply direct competition, he told InvestorDaily.
“Adding to this thesis has been the fact that, in the last month or two since bitcoin ETFs were launched, gold ETFs have seen outflows – but bitcoin and gold cater to very different audiences.”
He explained that the kingmakers in the gold market are central banks, pointing out that the largest global owners of gold remain the US Federal Reserve and the German Bundesbank.
“What’s driven the gold price to record highs – at the moment, it’s at an all-time high – has been driven by central banks, led by China, in the last two years. I’m not aware of any central banks buying bitcoin, but that’s not the target constituency and central banks aren’t the price setters in the crypto community,” he said.
“Bitcoin, on its part, has a varied constituency but it’s not central banks, and while the prices have started to correlate a bit in recent months, there’s not a lot of substitutability there.”
According to Tuckwell, “no serious person believes that bitcoin can be substituted for gold in a portfolio”.
“The two have very radically different functions. A reason to buy bitcoin is the potential price returns it provides [as] the price has gone up stratospherically in the past 10 years since it entered the mainstream, so investors want that long-term potential price growth. But gold, in contrast, has been a portfolio ballast, a diversifier, and a ‘safe haven asset’.”
One of the strongest arguments against the substitutability of the two, Tuckwell added, is that money exiting gold ETFs has preceded the launch of bitcoin ETFs.
In its latest report, the World Gold Council reported outflows from global physically backed gold ETFs of US$2.9 billion in February, a trend that has entered its ninth consecutive month.
“Money was leaving gold ETFs several months before bitcoin ETFs were launched,” Tuckwell stated.
“Just because two things happen at the same time, it does not logically follow that one is caused by the other.”
