First Mover: Why Bitcoin Isn’t a Replacement for Gold Just Yet

November 24, 2020

Everything you need to make sense of the crypto markets and beyond

By the CoinDesk Markets Team

Edited by Omkar Godbole

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Bitcoin (BTC)

+0.30% $19,217

Ether (ETH)

-0.07% $597

(Price data as of Nov. 25 @13:04 UTC)

HOLIDAY NOTICE: First Mover will publish next on Monday, Nov. 30. Happy Thanksgiving to U.S. subscribers.

TODAY:

Price Point: Bitcoin takes a breather just ahead of lifetime highs, tests investor patience.

Market Moves: Bitcoin has replaced gold as a haven asset, or has it?

Bitcoin Watch: Options market is skewed bullish and on-chain data is signaling strong holding sentiment, CoinDesk's Omkar Godbole writes.

What's Hot: Coinbase to suspend all margin trading, Binance ramps up crackdown on U.S. users, Ethereum 2.0's Genesis Day is officially set for Dec. 1, Digital yen would make crypto markets "more lively."

Price Point

Bitcoin is trading near $19,220 after rising 4.2% on Tuesday to close above the $19,000 mark for the first time since Dec. 16, 2017. The cryptocurrency is now within sight of its all-time high of $19,783 reached three years ago.

"Bitcoin at $19,000 is just another stepping stone to a new all-time high, and big market coins are taking turns rallying. That's a sign that institutional money continues to pour into crypto markets," William Noble, chief technical analyst at Token Metrics, said in an email. "ETH 2.0 will reignite interest in the decentralized finance space, and we should see the small alternative cryptocurrencies taking off very soon."

Major alternative cryptocurrencies have picked up a bid over the past few days and have outperformed bitcoin in the past 24 hours. While the crypto market leader has gained over1%, XRP and Stellar lumens have rallied 12% and 41%, respectively. Tron and monero are up over 6%, while ether is flat.

In traditional markets, optimism over potential coronavirus vaccines continues to power gains in risk assets. European stocks are trading on a positive note, although with less enthusiasm, while the S&P 500 futures are pointing to a flat open on Wall Street. Elsewhere, gold has bounced slightly from the four-month low of $1,800 reached Tuesday.

Market Moves

The price of gold is off from its all-time high while bitcoin is within striking distance of a record. Billions of dollars are flowing out of gold while institutional money is pouring into bitcoin.

The narrative for some cryptocurrency advocates – and a growing chorus on Wall Street – is that investors have finally seen the light and are pulling money out of the yellow metal – an ancient hedge against inflation – and into bitcoin, the safe haven of the future.

However, another explanation could be that a sunnier global economic outlook means there’s a little more comfort risking money on digital assets. Rather than a doomsday trade, bitcoin is a sign of exuberance in this interpretation.

While trading 8.5% higher from when the year started, gold is still down more than 12% from its all-time high set back in early August, closing at $1,805 per troy ounce Tuesday. A couple of weeks ago, $4 billion left the gold market, a record outflow, according to Bank of America. Bitcoin, meanwhile, is up 162% year-to-date.

Last week, JPMorgan analysts Nikolaos Panigirtzoglou, Mika Inkenen and Ekansh Agarwal wrote in their “Flow & Liquidity” report about the recent growth spurt of the Grayscale Bitcoin Trust, citing it as a proxy for institutional interest in bitcoin (Grayscale is digital asset management firm owned by DCG, parent company of CoinDesk). The JPMorgan analysts wrote:

“What makes the past five weeks [sic] flow trajectory for the Grayscale Bitcoin Trust even more impressive is its contrast with the equivalent flow trajectory for gold ETFs, which saw modest outflows since mid-October…. This contrast lends support to the idea that some investors that previously invested in gold ETFs, such as family offices, may be looking at bitcoin as an alternative to gold… [T]he potential long-term upside for bitcoin is considerable if it competes more intensely with gold as an ‘alternative’ currency, given that the market cap of bitcoin (at $340bn) would have to rise 8 times from here to match the total private sector investment in gold via ETFs or bars and coins which stand at $2.6tr.”

For bitcoiners, that read like the lyrics for the Song of Angels. It was another affirmation of the idea that the cryptocurrency can compete with gold and has plenty of upside to go. It was an echo of other fund managers saying similar things, like when Paul Tudor Jones compared the two back in May or when BlackRock CIO Rick Rieder said last week that bitcoin “could take the place of gold to a large extent.”

Correlations Coefficients for Bitcoin and S&P 500 vs. Bitcoin and Gold (90 Days)

Sure, bitcoin remains more correlated to gold than it does the S&P 500, which had a record day Tuesday. The 90-day correlation coefficient for bitcoin and the benchmark U.S. stock index is currently 0.26 while it’s 0.38 when compared to bullion. (A correlation coefficient of 1 means the prices of two assets move in perfect lockstep; a negative figure means they move in opposite directions while 0 means there is no relationship between them.)

‘Alternative?’ Maybe not so fast

Recent market movements seem to be saying something quite different, and that appears to be related to the money flowing from gold into digital assets. Gold prices took a 5% hit on Nov. 9, the day of the announcement that preliminary data showed a 90% efficacy rate for Pfizer’s COVID-19 vaccine. Bitcoin immediately jumped 2% on the news. Each subsequent week has started with even more encouraging results from other vaccine trials and the trends are falling gold and rising bitcoin.

If money is leaving gold and going into bitcoin, it may well be because with more optimism in the economy comes more willingness to get into “risk on” trades like stocks... and cryptocurrencies. That doesn’t make bitcoin a safe haven play except as speculation that it might be used as a safe haven sometime in the distant future. A nuanced difference but a difference, nonetheless. That difference could be evident should another crisis befall us in the near term.

As it is still 2020, anything can happen.

- Lawrence Lewitinn

Introducing Valid Points, a CoinDesk Newsletter

CoinDesk is staking 32 ETH in Ethereum's historic upgrade, and research analyst Christine Kim and tech reporter Will Foxley are breaking down Ethereum 2.0 and its sweeping impacts on crypto markets, weekly. Using data direct from CoinDesk’s own Eth 2 validator node, Valid Points features original insights about what the future of Ethereum looks like for industry stakeholders and investors.

The Valid Points newsletter launches with Eth 2.0's launch. Learn why CoinDesk staked 32 ETH in the new blockchain protocol and follow our journey and insights by subscribing to Valid Points here.

Bitcoin Watch

Bitcoin's implied volatility rises to multi-month highs. (Skew)

Bitcoin remains on the hunt for record highs amid heightened investor expectations for near-term price turbulence.

The cryptocurrency looks to have found acceptance above $19,000 and is just over 2.5% short of challenging the peak price of $19,783 observed in December 2017. Prices have risen by $9,000 since early October.

Bitcoin's one-month implied volatility, which is influenced by demand for call (bullish) and put (bearish) options, has risen to 81%, the highest level since May, having begun the month at 58%, according to data source Skew. Implied volatility represents investors' expectations of how turbulent the market would be over a specific period.

The rise in implied volatility seen this month looks to have been caused by increased demand for call options. That is evident from the record low values seen in one-, three- and six-month put-call skews, which measure the spread between the cost of puts (bearish bets) and calls (bullish bets).

"The recent spike in implied volatility is the result of a decent chunk of call buying,” Vishal Shah, an options trader and founder of derivatives exchange Alpha5, told CoinDesk. “Investors are positioning for a bull market continuation.”

The continued slide in the number of coins held on exchanges also points to bullish investor sentiment. Cryptocurrency exchanges held 2,384,888 bitcoins on Tuesday, the lowest tally in over two years, according to data source Glassnode. The number has declined by more than 17% this year.

- Omkar Godbole

Read More: Bitcoin Options Market Suggests Investors Preparing for All-Time High

What's Hot

Webinar: How to Value Ethereum

The penultimate episode of How to Value Ethereum explores the metric of gas costs. How is gas calculated? What is its unit of account? And why is it an important metric to valuing Ethereum?

Find out the answers to these questions by registering for How to Value Ethereum, episode 3, on Nov. 24.

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Disclaimer: The information presented in this message is intended as a news item that provides a brief summary of various events and developments that affect, or that might in the future affect, the value of one or more of the cryptocurrencies described above. The information contained in this message, and any information liked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.

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