Crypto Long & Short: Bitcoin’s Relationship With Gold Is More Complicated Than It Looks

Earlier this week, JPMorgan published a global markets strategy note that points out money has flowed out of gold and into bitcoin since October, and predicts this trend will continue over the medium to longer term.

The easy conclusion is that investors are finally understanding that bitcoin is a superior future store of value to gold, and are rotating out of one and into the other.

I’m not convinced that’s what we’re seeing. I agree with the analysts, though, that inflows into bitcoin will continue to increase, but not because investors are changing their minds. There’s something else going on.

The main gold exchange-traded funds (ETF) are losing funds – that much is true. SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) have seen outflows of over $4.4 billion in the past month alone, according to FactSet. The Grayscale Bitcoin Trust, however, which trades under the symbol GBTC and is managed by Grayscale (owned by DCG, also parent of CoinDesk), has seen inflows of over $1 billion in the same period, according to the latest 8-K filings.

But the two trends are not necessarily correlated.

Gold fund outflows are not that unusual, as the below chart shows.

What’s more, the latest movements come after a phenomenally successful few months – since the beginning of 2020, GLD and IAU saw inflows of over $25 billion, marking the strongest year for inflows over the past decade. Even with the latest outflows, it has been a very good year for gold funds.

The gold price has responded, delivering 35% performance between Jan. 1 and its peak in August. What we could be seeing is a simple rebalancing as investors lock in profits to reinvest elsewhere.

Add to that a change in risk-off sentiment, as investors see less need for “safe haven” investments given positive vaccine news and the potential for strong growth next year, not to mention confidence the U.S. Federal Reserve will keep the markets happy, and you have an unsurprising shift away from gold. That does not mean that institutions are replacing their positions with bitcoin.

We do know, though, that institutions are getting interested, and a growing number are becoming active in the crypto market. These institutions are not the only drivers of bitcoin inflows, however.

The GBTC trust mentioned above is only available upon issuance to accredited investors, who can sell on the over-the-counter (OTC) market after a six-month lock-up period. The listed price carries a premium to the underlying value, which represents the strength of retail demand for bitcoin exposure. In what is known in the market as the “premium trade,” accredited investors that sell into the market after the lock-up capture both any bitcoin appreciation and the premium, and often reinvest all or part of the proceeds into new trust shares. Without strong retail demand, the GBTC premium would dwindle.

Retail investors are probably behind some of the outflows in gold ETFs, and some are probably rotating into BTC. But there’s a bigger story unfolding.

It’s the generational shift.

This week, financial advisory firm deVere released the results of a survey of over 700 of its millennial clients, which showed two-thirds of them prefer bitcoin to gold as an investment. This means any new savings entering the market may be almost 70% more likely to be put in bitcoin than into gold.

This makes intuitive sense: Millennials are more comfortable with technology than their elders, and can probably grasp the potential more easily. And a Pew report last year showed younger Americans are less likely to trust institutions than older generations. Recent events are likely to have weakened this trust even further, at a time when the savings rate of those millennials and Gen Z-ers fortunate enough to have kept their jobs through the pandemic is increasing.

A New York Times article from earlier this year presented the millennial generation as focused on early retirement, which will concentrate their attention on long-term value that cannot be inflated away.

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

For one thing, it is difficult for retail investors to actually hold gold. Sure, they can buy shares in a gold ETF, but that implies more centralized control and institutional vulnerability than a self-custodied bitcoin investment. And in an environment of weakened trust in the current system, self-custody of bitcoin is a much easier solution than is self-custody of gold.

So we are likely to have significant new demand for bitcoin as a portfolio investment coming in from younger retail investors, at a time professional investors are also taking notice. It’s not just bitcoin fundamentals at work. Many professional investors will be interested in bitcoin investment precisely because of this potential growth narrative – other people wanting bitcoin is enough to make them want bitcoin.

And, unlike gold, growth in demand for bitcoin does not affect its supply, which feeds the narrative loop even more.

Throw in the dwindling rate of new bitcoins entering the system, and the demand-supply dynamics could entice even traditional investors to take an interest. This week we saw Massachusetts Mutual Life Insurance Co. – yes, an insurance company – invest $100 million in bitcoin.

This does not mean that gold investment is over. Gold’s role as a store of value is well entrenched in investment lore, and even forward-thinking and open-minded investors and advisers recommend that bitcoin complement the precious metal rather than replace it.

But a new generation of investors is starting to rewrite the rulebook. For now, the impact on gold flows is negligible, and we will see funds rush into industry ETFs when markets get wobbly and the commodity price starts to move up again. But demographics and sentiment are two powerful forces that, working in tandem, can move mountains – even those made of gold.

Software firm MicroStrategy’s enthusiasm for bitcoin is now industry lore. The company was the first to publicly acknowledge putting all of its excess treasury in the crypto asset, and its CEO Michael Saylor has become a crypto celebrity with his conviction and insight, even making CoinDesk’s Most Influential list this year.

This week he went even further: Not content with the $475 million already invested in the asset, MicroStrategy issued $650 million of convertible bonds (which was initially going to be $400 million and then got raised to $550 million and then got raised to … you get the picture), the proceeds of which will go to buy more bitcoin.

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