Bitcoin is Digital Gold as JPMorgan Sees Institutions Dump Metal for BTC
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Bitcoin is the new gold – that is the inference of a JPMorgan client note that shows institutional investors switching from gold to bitcoin.
Bitcoin is currently priced at $55,400, having jumped 37% since the end of September in a huge rally that has so far defied predictions of over extension.
The leading crypto now has a market cap surpassing $1 trillion. Even more impressively, the charge higher has been against the background of turmoil in traditional financial markets such as equities and bonds.
JPMorgan researchers located three reasons for the recent strong performance of bitcoin, and they all make sense:
1. “The recent assurances by US policy makers that there is no intention to follow China’s steps towards banning the usage or mining of cryptocurrencies.”
2. “The recent rise of the Lightning Network and 2nd Layer payments solutions helped by El Salvador’s bitcoin adoption.”
3. “The re-emergence of inflation concerns among investors has renewed interest in the usage of bitcoin as an inflation hedge.”
The most important of those is probably the statements from Jay Powell at the Fed and Gary Gensler at the SEC underscoring that the US authorities have no intention of banning crypto.
Bitcoin is the digital gold inflation hedge
But at the macro level the inflation hedge attractiveness of bitcoin may be the more systemic of the reasons for a step up in institutional buying of bitcoin. Despite statements to the contrary from central bankers in the advanced economies, market participants are beginning to price in elevated inflation that proves a lot stickier than the “transitory” estimates from the Fed, the Bank of England and the European Central bank recently.
With inflationary pressures building, seen most acutely in energy and food prices, “institutional investors appear to be returning to bitcoin perhaps seeing it as a better inflation hedge than gold,” write the authors of the JPMorgan note.
Evidence of that is illustrated in the chart below from the note:
This week’s action has provided further confirmation of this trend, if any were needed, as can be seen in the chart below.
Gold has also suffered from the strengthening US dollar and a rise in US treasury yields, with the international borrowing benchmark 10-ear note trading above 1.53%. The yellow metal has lost 7% of its value this year.
Bitcoin ETPs gaining in popularity – US bitcoin futures ETF coming soon?
JPMorgan says that year to date in excess of $10 billion has exited gold ETFs, while at the same time more than $20 billion has flowed into bitcoin ETPs, according to the bank.
Most of the crypto ETPs (which includes ETFs but also exchange traded notes and similar instruments) are in Europe, with Switzerland, Germany and Sweden home to some of the most popular. However launches of Canadian crypto ETFs this year has attracted many US institutional buyers who are currently starved of such funds in the US. Brazil has also approved a Crypto ETF.
Gensler at the SEC has let it be known that he favours a bitcoin futures approach for an approved ETF in the US and such products may be coming as soon as this year or early next. Bitcoin futures are regulated instruments that trade on the Chicago Mercantile Exchange, the largest derivatives market in the world.
The investment bank also described the increase in bitcoin dominance (currently 44.37% according to coinmarketcap as defined as percentage of total market cap) of the cryptocurrency complex as a positive because it sees this as indicative of greater institutional involvement in the nascent asset class. “The increase in the share of bitcoin is a healthy development as it is more likely to reflect institutional participation than smaller cryptocurrencies,” JPMorgan noted.
However, as the chart below shows BTC dominance has not substantially recovered from its steep fall to 39% on 19 May 2021 and the corresponding increase in Ethereum dominance to around 20%.
Layer 1 protocols a threat to future bitcoin dominance
Although Layer 2 solutions such as the Lightning Network help to make bitcoin more practical as a means of exchange for everyday items in effectively increasing transaction throughput by bundling transactions off-chain and then writing back to the chain periodically, Layer 1 solutions such as Solana, Tezos and Ethereum 2.0 when it arrives, threaten to further erode bitcoin’s dominance, although this is not addressed in the JPMorgan client note.
The recent initiation of coverage of crypto by Bank of America further adds to the mounting evidence of strengthening institutional interest in cryptoassets as investors looks to diversify their portfolios to take account of the risk of inflation eating into capital returns.
