EDITOR NOTE: The idea of seeking “safety” in a popular yet highly speculative asset is a strange phenomenon. It’s as if “safety in numbers” (as in popularity) and “safe haven” were somehow confused and viewed exchangeable on equal terms. Such is the case with bitcoin, which tumbled from a high of over $65,000 a coin to a low of almost $30,000 in just three weeks. Investors can easily point fingers at Elon Musk whose bitcoin adoption via Tesla and quick about-face served as catalysts for the cryptocurrency’s dramatic rise and fall. But again, wasn’t bitcoin supposed to be the “new gold” or rather “millennial gold”? If so, to what degree does “personality risk” play for an asset that holds, supposedly, its own unique form of “intrinsic value.” But perhaps the dissolution of that image is what we’re seeing here. And perhaps, many retail investors mistakenly saw speculative fervor in bitcoin as proof of its popularity as a safe haven like physical gold and silver, not realizing that somehow they’ve been excluded from the real play. You know what they say in poker--if you look around the table and can’t see the sucker, you’re it. So, now we’re seeing large outflows from bitcoin converting to large inflows toward gold--swapping the new for the old, or the speculative for the stable. Or maybe, we’re seeing a flow from the overvalued to the undervalued (gold), which is a legitimate strategy. Either way, both constitute an anti-inflation and anti-Fed trade. But here’s the thing: if all fiat were to collapse, hypothetically speaking, central banks across the globe will open their vaults to find the only currency left: gold. And when the BASEL III implementation kicks in January 2023, gold will once again become a Tier 1 asset. Bitcoin will remain speculative--subject to the whims of sentiment, and likely far from the tradewinds of adoption and exchange.
Institutional investors are switching out of bitcoin and are instead returning to gold, for the first time in six months, JPMorgan research analysts said in a note on Tuesday.
A combination of rising inflation, tightening regulation and ripples running through the online crypto community after Elon Musk announced that Tesla would no longer be accepting bitcoin as a form of payment for environmental reasons have caused bitcoin's price to tumble in recent weeks.
Since hitting a record high of almost $65,000 in mid-April the asset has lost around half its value to last trade around $35,470 on Wednesday.
"The bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors. Over the past month, bitcoin futures markets experienced their steepest and more sustained liquidation since the bitcoin ascent started last October," JPMorgan said.
Momentum traders including crypto funds that have unwound assets recently are partially responsible for this, according to the research note. A key momentum indicator has therefore turned negative from a short term perspective, which could lead to more traders selling off their assets.
In the longer term however, the momentum indicator is still positive. "It is perhaps too early to characterize bitcoin as oversold," JPMorgan said, adding that bitcoin futures and related products had also been affected by the drop in value of the digital asset.
"What is striking is that the recent outflows from bitcoin funds have been accompanied by inflows into gold ETFs in a reversal of the last quarter of 2020 and the beginning of this year," the research note said, adding that a similar pattern can be observed with futures contracts on the two assets.
Large parts of the crypto community have hailed bitcoin as the new gold, especially young investors who see it as a more worthwhile investment compared to bullion, which has earned bitcoin the nickname "millennial gold".
The ongoing shift is mostly driven by institutional investors, JPMorgan said. From an institutional perspective, flows into bitcoin began to slow down during the first three months of this year and turned negative at the beginning of the second quarter. In comparison, retail flows have stayed relatively stable throughout.
The reasons behind the shift are however unclear, although JPMorgan said bitcoin's volatility, especially the speed at which it tends to fall, was at odds with gold's greater price stability.
"Or they perhaps view the current bitcoin price as too high relative to gold and thus do the opposite of what they did in the previous two quarters, i.e. they sell bitcoin and buy gold," the bank said.
Originally posted on Business Insider