Crypto Lengthy & Brief: Bitcoin's relationship to gold is extra sophisticated than it seems to be


Earlier this week, JPMorgan released a strategy report for global markets, indicating that gold has moved money into Bitcoin since October, and predicts that trend will continue in the medium to long term.

The simple conclusion is that investors are finally beginning to understand that Bitcoin is a superior future store of value for gold and are turning from one to the other.

I am not convinced that we will see that. However, I agree with the analysts that inflows into Bitcoin will continue to increase, but not because investors change their minds. There is still something going on.

In and out

The main gold ETFs are losing money – that much is true. SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) saw outflows of over $ 4.4 billion in the past month alone, according to FactSet. The Grayscale Bitcoin Trust, which operates under the symbol GBTC and is managed by Grayscale (owned by DCG, also CoinDesk's parent company), reported inflows of over $ 1 billion over the same period, according to the latest 8K records.

However, the two trends are not necessarily correlated.

Gold fund outflows are not as uncommon as the graph below shows.

Weekly net inflows and AUM for SPDR gold stocks (GLD) – left axis: AUM $ m, right axis: inflows $ m)

Source: FactSet

Additionally, the latest moves come after some phenomenally successful months – since early 2020, GLD and IAU have seen inflows of over $ 25 billion, making it the strongest year for inflows in the last decade. Despite the recent outflows, it was a very good year for gold funds.

The price of gold has reacted, with a performance of 35% between January 1st and its peak in August. What we could see is a simple realignment as investors make profits to re-invest elsewhere.

Add to this a shift in risk-off sentiment as investors see less need to invest in “safe havens” with the positive vaccine news and the potential for strong growth next year, not to mention confidence that the US Federal Reserve will make the markets happy and you have an unsurprising move away from gold. That doesn't mean institutions are replacing their positions with bitcoin.

Growing trust

However, we know that institutions are interested and a growing number are becoming active in the crypto market. However, these institutions are not the only drivers of bitcoin inflows.

The GBTC trust mentioned above is only available when issued to accredited investors who can sell on the OTC market after a six-month blocking period. The quoted price includes a premium to the underlying value that represents the strength of retail demand for Bitcoin exposures. In so-called “premium trading”, accredited investors who sell after the lock-up on the market record both the Bitcoin increase in value and the premium and often invest all or part of the proceeds in new trust shares. Without strong retail demand, the GBTC premium would decrease.


GBTC bonus

Source: Ycharts

Retail investors are likely behind some gold ETF outflows, and some are likely to switch to BTC. But there is a bigger story.

It's the generation change.

The sands of time

This week, financial advisory firm deVere released the results of a survey of over 700 of its millennial clients, which found two-thirds of them preferred Bitcoin as an investment to gold. This means that new savings that hit the market are almost 70% more likely to be invested in Bitcoin than gold.

This makes intuitive sense: Millennials are more familiar with technology than their elders and are likely to see its potential more easily. And a Pew report last year showed that younger Americans are less likely to trust institutions than older generations. Recent events may have weakened that confidence even further, at a time when the savings rate of these Millennials and Gen Zers fortunate enough to have kept their jobs during the pandemic is rising.

In an article in the New York Times earlier this year, the millennial generation was introduced as early retirement, with its focus on a long-term value that cannot be blown away.

All of this makes young people more likely to invest in inflation-resistant assets, but less so in gold.

For one thing, it is difficult for private investors to actually hold gold. Sure, you can buy shares in a gold ETF, but that implies more centralized control and institutional vulnerability than a self-managed bitcoin investment. In an environment of weakened confidence in the current system, Bitcoin self-custody is a much simpler solution than gold self-custody.

Old and new

So we are likely to have significant new demand for Bitcoin as a portfolio investment from younger retail investors, at a time that professional investors are also taking note of. It's not just bitcoin basics at work. Many professional investors will be interested in Bitcoin investing precisely because of this potential growth narrative – other people who want Bitcoin are enough to make them want Bitcoin.

And unlike gold, the growth in demand for bitcoin doesn't affect supply, which feeds the narrative loop even more.

If you bring the falling rate of new bitcoins into the system, the demand-supply dynamics could lead even traditional investors to care. This week we saw Massachusetts Mutual Life Insurance Co. – yes, an insurance company – invest $ 100 million in Bitcoin.

This does not mean that the gold investment has ended. Gold's role as a store of value is firmly anchored in investment history, and even forward-thinking and open-minded investors and advisors recommend that Bitcoin complements the precious metal rather than replacing it.

But a new generation of investors are starting to rewrite the rules. For now, the impact on gold flows is negligible, and we'll see funds flow into industrial ETFs as markets shake and commodity prices rise again. However, demographics and sentiment are two powerful forces that can work together to move mountains – even mountains made of gold.

balancing act

The enthusiasm of the software company MicroStrategy for Bitcoin has now spread across industries. The company was the first to publicly acknowledge that it poured all of its surplus treasury into the crypto asset, and its CEO Michael Saylor has become a crypto celebrity with his convictions and insights, and has become the most influential this year List created by CoinDesk.

This week, it went one step further: MicroStrategy was not satisfied with the $ 475 million already invested in the asset and issued $ 650 million in convertible bonds (which was originally $ 400 million and then abandoned $ 550 million and then on … you get the picture), the proceeds of which will be used to buy more Bitcoin.

Is he crazy Or is this the corporate treasury management of the future?

In my opinion, possibly both. Bitcoin is a relatively volatile asset, and corporate treasury is not the place to take risks. Citi appears to agree, as it has downgraded its MicroStrategy stock recommendation to a "sell" this week. At the time of writing (Friday afternoon), the stock's price has fallen nearly 15% over the week.

However, Bitcoin is actually a potentially excellent corporate treasury asset. Ria Bhutoria and Tess McCurdy of Fidelity Digital Assets and Jeff Dorman of Arca Funds have written great pieces this week detailing this point.

Ria and Tess list different ways Bitcoin can mitigate typical corporate treasury risks. For example, balance sheets are often exposed to liquidity risk where a company does not have enough cash to pay off debts and therefore has to sell less cash at unfavorable prices. Holding bitcoin in place of these less liquid assets releases cash to meet obligations, as bitcoin can be used as collateral on many lending platforms.

Exchange rate risk makes a company vulnerable to fluctuating exchange rates and fees – Bitcoin could act as a "bridge value" on the balance sheet, getting in and out of currency pairs at a lower cost.

Jeff points out that keeping cash on balance sheet is a hassle for large businesses and typically involves multiple accounts, limited banking hours, transfer fees, and the need to generate a return on cash holdings. He also hinted, and this might be fun, that activist investors might soon be putting pressure on companies to diversify treasury holdings using Bitcoin.

I am interested in the possible use of Bitcoin as security for working capital management. Ria and Tess brought up this, but I think it could go further and eventually lead to a new type of repo market.

Yes, Bitcoin fluctuates in relation to fiat, and the company's funding needs are in relation to fiat – but the bearer nature of bitcoin combined with its ease of transfer and work on its smart contract functionality, as well as the growing support for the custody of bitcoin by financial institutions, is wise to some interesting developments in this application in the coming years.

Does anyone know what's still going on?

With the specter of no Brexit agreement getting closer and US economic talks stuck in a political stalemate, markets showed some signs of nervousness this week – not nearly as bad as the dire outlook justify who justify themselves the new normal.


Interestingly, BTC's poor performance this month doesn't seem to have dampened sentiment in the industry. YTD performance is still higher than traditional alternatives, institutions continue to show interest, and infrastructure development continues. Despite this week's slump, there still seems to be a sense of accumulation.


Continuing the idea I started last week of listing the professional investors and institutions talking about Bitcoin in a separate section (as the comments come in dense and fast these days) the following people / companies said some relevant things:

  • An editorial in the Financial Times by Morgan Stanley Investment Management's global chief strategist positions Bitcoin as a potential replacement for the dollar as a global currency. "There are reasons to believe that this bitcoin rush has deeper roots."
  • Founder of Bridgewater Associates Ray Dalio, who has spoken out against Bitcoin in the past, softened his stance, saying in an AMA on Reddit this week that he thought Bitcoin and other cryptocurrencies had "established themselves" in the past 10 years and were an interesting "gold-like" asset -Alternatives. "
  • In a long Twitter thread, investor Raoul Pal on the potential value comparisons and growth drivers for BTC and ETH: "My guess is that BTC is a perfect security layer, but ETH could be bigger in terms of market capitalization in 10 years."
  • Mohamed El-Erian, The chief financial advisor to the € 2.3 trillion fund manager Allianz tweeted last week that he had sold Bitcoin after a two-year stake and that his decision was "not based on in-depth analysis."
  • German media giant Bertelsmann invested in a crypto fund managed by venture company Greenfield One.

An insurance company founded in 1851, Massachusetts Mutual Life Insurance Co.has invested $ 100 million in Bitcoin and $ 5 million in a stake in Crypto Fund Manager NYDIG. BRING AWAY: You read that right: an insurance company invested in Bitcoin. As far as I know, this is the first major insurance company to do this, and the size of the investment – just 0.04% of the general investment account – is just a "first step" according to the company, giving an idea of ​​the size of the potential funds if other insurance companies should follow suit.

Fidelity digital assets enters the crypto lending business, albeit indirectly, enabling its institutional clients to pledge bitcoin as collateral for cash loans in a partnership with crypto lending company BlockFi. BRING AWAY: The growth of the lending business should be watched as it is a maturation of the market as well as a sign that liquidity will continue to improve. In addition, the growing awareness of the advantages of Bitcoin as collateral is likely to lead to the emergence of new types of infrastructure, as well as new use cases for Bitcoin and other cryptocurrencies.

According to sources, Spanish bank BBVA will soon start cryptocurrency services based in Switzerland. These services include trading and custody. BRING AWAY: If so, it would be a large bank (second largest in Spain, 17th in Europe) that validates cryptocurrencies as a tradable asset. The bank has been considered one of the “most digital” and most forward-looking in Spain for some time (a few years ago I heard the then chairman Francisco González say: “We are not a bank. We are a technology company.”) And have been experimenting with blockchain since at least 2015. Applications, which should give it a head start. If BBVA launches crypto trading and custody for its clients, other banks are sure to follow suit.

According to Michael Sonnenshein, managing director of the Crypto Fund Manager Grayscale investment (owned by DCG, also the parent company of CoinDesk), more and more accredited investors are investing in the company's Ether Fund (ETHE) even before investing in the industry-standard "on-ramp" of their Bitcoin fund. BRING AWAY: This points to more than just an increasing refinement of investors' understanding of the different value propositions of ether and bitcoin. It also signals that investors are increasingly understanding that the ecosystem is much more than just seizure-resistant hard supply assets and that native assets are technologies in and of themselves, each with their own strengths and potentials. It will be interesting to see if these investors continue to focus solely on Ether, or if it itself becomes a focal point for investing in Ethereum-based tokens and possibly other protocols.

Germany's second largest exchange, Borse Stuttgart, revealed that its Bison crypto trading app has exchanged crypto assets worth 1 billion euros ($ 1.21 billion) so far this year. BRING AWAY: This is an important indicator of retail interest, and the growth in the number of active users (180% to 206,000) on an app older than two years suggests strong momentum.

Bitwise asset management announced this week that its 10 Crypto Index Fund is now available to US investors as a publicly traded Cryptocurrency Index Fund under the symbol BITW. BRING AWAY: It has only been trading for a few days, so it is too early to assess liquidity. The main competitor is Grayscale's Digital Large Cap Fund. (Note: Grayscale is owned by DCG, also the parent company of CoinDesk.) Like the Large Cap Fund, BITW is available to accredited investors upon issue and can be sold to the public after a 12-month lock-up period. Like the Large Cap Fund, BITW trades at a premium to net asset value – that premium has increased to nearly 130% since inception at the time of writing.

The involvement of older banks in crypto assets is picking up speed.

  • Bank based in the Netherlands ING spoke publicly for the first time this week about the collaboration to date with Pyctor, a collaboration between ING, ABN AMRO, BNP Paribas Securities Services, Citibank, Invesco, Societe Generale, State Street, UBS and others, for custody and aftercare improve trading infrastructure for crypto assets.
  • And Standard Chartered Fintech Investment Unit, SC Ventures and Northern Trust announced Zodia Custody, a UK-based cryptocurrency custodian for institutional clients, expected to start operations next year.
  • Standard Chartered has also put together a group of crypto exchanges for a new digital asset trading platform that sources say is tailored for the institutional market.

BRING AWAY: The entry of older financial institutions into the crypto asset services business is beyond doubt, and in the next year we will most likely see at least a handful of them offering these services to their customers. (Last week we reported that Spain's BBVA will shortly announce the upcoming launch of crypto services). This will greatly increase overall confidence in crypto assets – if banks are offering these services it has to be legitimate, right? – and could lead to some bundling when banks make strategic acquisitions in the crypto industry. For some banks it will be a matter of quickly consolidating their position and building ancillary services, for others it will be a matter of catching up.

BitGo has expanded its suite of white gloved crypto brokerage services to include capital raising services. BRING AWAY: This is another pillar in the emerging prime brokerage structure that is emerging in crypto markets. The raising of capital in crypto markets will do more than just introduce fund managers to institutional funds. It will also be an opportunity to educate more institutional investors about crypto assets.

The number of Bitcoin "whales" According to blockchain forensics company Chainalysis, the number of holders of over 1,000 BTC has increased by 17% in 2020. BRING AWAY: The industry likes to pursue this because it represents a deep belief and / or institutional interest. A higher number of large owners also leads to a certain degree of centralization through the concentration of assets and the risk that one of these owners could sell, which drives the market down. However, the same analysis shows that the number of wallets holding 5 to 10 BTC has increased by a considerable amount.

Chain Analysis WalletsSource: chain analysis

Crypto exchanges in the US Bittrex Global started trading token stocks such as Apple, Tesla, Facebook and Amazon on its digital assets exchange. BRING AWAY: You may be wondering why investors want to do this when they can take advantage of their traditional broker. However, it does offer a wider range of investment options for Bittrex users who may not have a traditional brokerage account or who may not want to transfer funds. And more importantly, it offers fractionation of the stocks, which could make them more attractive to retail investors. Since Bittrex is not a large exchange (the 28th spot volume according to CoinGecko), the volume of these tokenized stocks is unlikely to be high – but this is a fascinating move towards tokenizing assets on a larger scale and could soon be the Open up access to non-US stocks as well as other types of assets.

Further evidence that the token securities market is developing calmly is the fund manager's innovation department Arca has partnered with several crypto firms (Anchorage, Gemini, Komainu, Ledger, and TokenSoft) to hold ArCoin, which is token shares in a SEC-registered fund that holds T-Bills. BRING AWAY: Choosing a number of custodians rather than a single one offers customers a more flexible solution and could increase the interest of investors who are already customers of the selected companies. Even more interesting, however, is that a boring, solid investment (a high quality annuity fund) can be exchanged peer-to-peer on a blockchain platform. This could change the perception of traditional investors that blockchain-based assets are risky and volatile, and open their minds to the versatility that tokenization offers. It's a start anyway.

Custody start Curve works with the Ethereum-based crypto wallet MetaMask to enable institutions to invest in DeFi protocols (decentralized finance) with institutional safe-keeping options. BRING AWAY: The DeFi industry is growing fast, but it is still tiny compared to traditional assets. However, the attractive returns and growth potential of some assets have started to attract institutional attention, and initiatives to help professional investors explore the space are emerging to aid this. We'll no doubt see more announcements like this in the months ahead.

An Ethereum-based fund managed by the Canadian mutual fund manager 3iQ completed an initial public offering on the Toronto Stock Exchange (TSX) under the symbol QETH.U for approximately $ 76.5 million. BRING AWAY: This is not available to US investors, which will limit their liquidity. The emergence of another listed ETH game, however, signals the increasing maturity of the ETH market infrastructure as a whole.


Melinda Martin