The Upgrade of “Devaluation Resistant Assets”: Can Bitcoin Really Replace Gold?

Photo by Aleksi Räisä on Unsplash

Older retail investors prefer gold, but the younger prefer bitcoin. As millennials become the dominant investor force in the U.S., bitcoin has at least one to two times the upside potential to follow.

Bitcoin vs. gold, who loses and who wins?

In the past ten days, the price of bitcoin has soaring, which breaks the $15,000, $16,000, and $17,000 full-digit barriers one after another, and briefly surging above $18,000 on Wednesday. It is just one step away from its all-time high of $19,994 in 2017.

On the other hand, since the dust has settled on the U.S. election and market uncertainty has diminished, the spot gold price has fallen from $1,950/oz to around $1,860 today.

Bitcoin’s surge has been spectacular, while gold has stalled, and both of these are happening against the backdrop of a weakening dollar. But if bitcoin’s current surge is only a story of fighting the dollar’s devaluation, why the market does not consider gold?

Compared to bitcoin, which is often on a “roller coaster”, gold is obviously more stable and is a conventional hedging asset, why does the market suddenly abandon it and consider bitcoin as a more suitable asset for hedging the dollar?

In a previous study, JPMorgan found that bitcoin and gold have performed like risk assets this year, and that investors’ choices are more likely to reflect a need for “alternative currencies” than a need for safe havens or hedging assets.

Among the retail investors, older and younger people have very different preferences for “alternative currencies”. In particular, the older prefer gold, while younger millennials are clearly more interested in bitcoin.

The relationship between bitcoin and gold and the U.S. dollar is becoming more positively correlated due to the massive inflows of gold and bitcoin ETFs during the year. In addition, the correlation between bitcoin and the S&P 500 has also been growing since March, because of millennials’ large purchases of both U.S. stocks and bitcoin.

As Bitcoin is still highly volatile at 50–60%, JPMorgan believes that it is more appropriate to characterize it as a risky asset than a safe asset.

The same goes for gold. This traditional safe-haven asset has had a mostly positive correlation to the S&P 500 this year, with 20% volatility more akin to stocks than to currencies or bonds.

Thus, investors’ preference for these two asset classes is more likely to reflect a demand for “alternative currencies” than a need for safe havens or hedging assets.

According to JPMorgan, given that the younger generation will become a more important part of the investor base over time, the growing corporate acceptance of bitcoin will encourage them to further consider bitcoin as an “alternative currency”. As a result, bitcoin is likely to compete more aggressively with gold in the coming years.

Whats’ more, given the current size of global investment in gold (the total size of gold ETFs is as high as $210 billion), Bitcoin’s potential upside is huge if it pushes gold out of the “alternative currency” market in the long term.

According to the aforementioned investment bank’s estimates, the market value of bitcoin would have to rise tenfold from its current level of $200~$300 billion to keep up with the total amount of private sector investment in gold through ETFs, gold coins and bars. Even if gold is not hit as hard, JPMorgan still says that bitcoin prices are expected to double or triple from the current levels.

Article from Wallstreetcn Zeng Xinyi

Translated by Yang(Mengyan Finance)

To translate some latest policy and issues on blockchain and fintech happened in China