Will Bitcoin Replace Gold?

The first US Bitcoin futures ETF, ProShares Bitcoin Strategy (trading code BITO), officially went live on October 19. In just 2 days, this fund has total fixed assets (AUM) 1.1. dressed Billion USDreaching the maximum number of contracts that the Fund can invest in the derivatives market of the Chicago Mercantile Exchange (CME).

The gold ETF mutual fund was deducted net

The above numbers show the attractiveness of the ETF tool in Bitcoin in the US market. Bitcoin price for the week also surpassed USD 66,000 / bitcoin, the highest level in history. Bitcoin’s market value exceeds 2,600 Billion USD.

These figures show that many investors in the US market want to invest “a little” in bitcoin, from traditional mutual funds to pension funds that cannot buy bitcoin directly due to the bitcoin investment obligation regulation. In the past, the only way to bypass the regulation was to invest in companies like Tesla or MicroStrategy, which had few holdings. Billion USD in bitcoin.

Meanwhile, the flow of money in gold goes in the opposite direction. From the beginning of June until today, the net money invested in the world’s largest gold ETF SPDR Gold was 3.6. deducted Billion USD. The international gold price has also fallen below USD 1,800 per ounce on the futures market, well below USD 1,950 per ounce at the beginning of the year or a high of over USD 2,050 per ounce last year.

When Bitcoin is referred to as “digital gold” by some fund managers such as Cathie Wood from ARK Invest, the comparison between Bitcoin and gold is inevitable, especially in this time of high global inflation.

“Why doesn’t gold go up when inflation is high?” This is the question many people ask themselves. And the simplest answer so far is that the money is not going into gold, but into many other asset classes.

There are many reasons for that. It is gold that has lost its appeal as interest rates are expected to rise in all countries and bond yields are expected to rise. As bond yields rise, especially in major currencies like the US dollar, holdings that don’t generate regular returns like gold are becoming less attractive, especially for mutual funds that seek fixed returns.

In addition, the changing structure of the population is changing the way young investors view inflation-hedging assets.

They prefer to own trending assets that have the same inflation-hedging properties as gold, such as Bitcoin. Whether this is true or not, it will have to wait a long time to know, but the fact that Bitcoin attracts a lot of money and is increasing rapidly while gold is increasing slowly makes gold unattractive in the eyes of young people.

For them, owning technology stocks or Bitcoin is a more profitable hedge against inflation than owning gold.

Bitcoin price rose from less than $ 4,000 in March 2020 to more than VND 66,000USD in October 2021. Source: Etoro

Large technology companies like Microsoft and Apple let sales and profits rise quickly when inflation is high because they can raise product prices sharply, pass high inflation-related costs on to customers and keep their profit margins constant.

Meanwhile, Bitcoin is on the rise as a wave of wealthy people and some traditional mutual funds, including Swedish and American pension funds, want to have Bitcoin in their portfolios.

When the pension funds of teachers, postal workers, truckers or firefighters, police officers buy bitcoins, this is a signal for the diversification of the portfolio and accepts bitcoin as a fork, so to speak.

Catch the market trend

Those who believe in Bitcoin think that the “golden fanatics” do not understand Bitcoin and will replace Bitcoin Gold. With this vision, they believe that bitcoin will rise up to $ 500,000 per bitcoin. How is it calculated? First, there will be a maximum of 21 million bitcoins due to Bitcoin’s algorithm.

The capitalization of the gold market will be 11,000. estimated Billion USD. So if bitcoin is the same capitalization as gold, the price of 1 bitcoin must be more than $ 500,000. The question is, can Bitcoin replace gold or be its equivalent? Let’s look at the current context. This week’s hit Bitcoin ETF manages around 1.1 Billion USD. The SPDR Gold Fund now manages more than 58 Billion USD.

Bitcoin’s market value is over 2,600 Billion USDwhile gold 11,000 Billion USD. These numbers show that Bitcoin is still a long way from catching up with gold with mainstream investors. However, the rise in Bitcoin is by only a few Billion USD Capitalized at 2,600 a few years ago Billion USD is something that cannot be ignored.

From a portfolio management perspective, it is conceivable that there is no absolute substitute, but portfolio diversification. Since many hedge funds hold gold at 5-6% of their portfolio value, some of them are counting on increasing bitcoin holdings to around 1%. As a result, they reduced their holdings of gold and other assets to allocate 1% of the assets invested in Bitcoin.

Depending on the future development of Bitcoin and Gold, mutual funds will adjust the allocation quota accordingly. Some hedge funds that own up to 12% gold may need to rethink, but those that invest heavily in Bitcoin also have their own risks due to Bitcoin’s high volatility. Bitcoin aficionados probably haven’t forgotten in March last year that after just a few days of volatility, 1 Bitcoin fell 50% to just under $ 4,000.

In a way, investing in gold or bitcoin can be compared to a generation gap. Old people like to listen to Trinh music and buy gold, just as young people like to listen to rap music and buy bitcoins. Nothing will go away. Sometimes rap listeners also enjoy listening to Trinh music and vice versa.

So instead of arguing or thinking about replacing gold with Bitcoin and vice versa, a portfolio allocation approach may be more appropriate for both types.

These calculations relate the international gold price to Bitcoin. Indeed, Vietnam’s gold price has its own path with a huge difference between domestic and international gold. On the other hand, although the Vietnamese market has its own population structure, the acceptance of crypto assets is also among the highest in the world, the legality of cryptocurrencies is not clear, and cryptocurrencies are not yet established.

If that changes, there will be interesting developments. Therefore, developments in Vietnam will also go their own way in terms of asset allocation. Instead of trying to argue about which is better, grasp market trends and make the best asset allocation decisions.

Ho Quoc Tuan, Lecturer at the University of Bristol, UK

Financial investment in Saigon