Is it a coincidence? Billions of institutional funds fled gold, and Bitcoin soared to record levels, and Wall Street broke out into a heated debate...

Source: FX168

FX168 Financial News Agency (Hong Kong) Bitcoin soared on Monday, setting a new record for the first time in nearly three years. The digital currency rose to $19,786.24 at one point, up 8.4% on the day. According to CoinDesk data, this exceeded the intraday record of $19,783.21 set on December 18, 2017. Bitcoin has nearly tripled in 2020 and has risen 97% since the beginning of September. At the same time, spot gold has fallen more than $300 from its record high.

Bitcoin surges to record levels just as billions of institutional funds flee gold.

Whether this is a simple coincidence or the start of a cycle that will have far-reaching consequences for cryptocurrency and precious metals markets is impossible to know for sure, but the debate is heating up over whether the world’s largest digital currency can one day rival gold as a hedge against inflation and as a way to diversify portfolios.

After rising 150% this year, Bitcoin last week suffered its biggest drop since March, highlighting the asset class’s well-deserved volatility that has scare off mainstream investors. But if they start putting a small portion of their gold reserves into the $350 billion Bitcoin industry, it would be a game changer for Wall Street’s diversification strategy.

“Gold was really the safe asset of the old world and the baby boomers, but now it’s been replaced by digital assets like Bitcoin.” Jean-Marc Bonnefous, a former commodities hedge fund manager turned crypto investor.

Digital currencies are traded by a motley crew of retail traders, speculative professionals and exotic quants, while traditional investors have so far stayed on the sidelines. That appears to be changing with Guggenheim Partners the latest to join the fray, along with legendary hedge fund manager Paul Tudor Jones and billionaire investor Stan Druckenmiller.

Analysts at JPMorgan Chase said that family offices and other funds are selling their holdings of gold ETFs that hold the digital currency. Since November 6, gold trading funds have sold 93 tons of gold, worth about $5 billion. Grayscale Bitcoin Trust, which is favored by institutional investors, has doubled in dollar terms since the beginning of August.

Bitcoin’s market value is currently just 3.1% of gold’s, said James Butterfill, investment strategist at CoinShares, which sells digital currency investments. He estimated that if the market value increased to 5%, it would mean a price increase to $31,300, compared with about $19,000 currently.

“Bitcoin is becoming a reliable store of value. This is particularly attractive during this period of unprecedented loose monetary policy. For these reasons, investors will naturally compare it to gold,” Butterfill said.

However, there are good reasons for gold's recent underperformance, such as progress in the development of coronavirus vaccines that has reduced safe-haven demand. As the market's inflation expectations are relatively stable, one conclusion may be that gold is just following "animal instincts" while Bitcoin has been in a speculative frenzy.

The latter has also found a fan at the world's largest asset manager - a sign of its growing appeal on Wall Street. Rick Rieder, chief investment officer of BlackRock's fixed income division, recently told CNBC that demand from millennials and Bitcoin's strength as a medium of exchange are supporting the "strength" of Bitcoin prices. He added that Bitcoin transactions are "much more powerful than passing a bar of gold."

One difference between the two is that all bitcoin transactions are viewable on the blockchain, whereas a large portion of gold trading takes place in London’s over-the-counter markets, where less data is available.

"The transparency of Bitcoin has helped generate a lot of interest," said Lyle Pratt, an independent investor who owns Bitcoin. "Gold is like a black box, and you have to trust the custodian to tell you anything that's moving in the market."

For Patrick Armstrong, chief investment officer at Plurimi Wealth, the risk is too great, even if Bitcoin could rise even more in an inflationary spiral. Armstrong has 6.5% of his discretionary funds in gold. Gold also has a long history as a store of value, something Bitcoin can’t match. There has been nagging speculation that another digital currency, possibly backed by a central bank, could replace it.

“If the debasement trade works, it’s very possible that Bitcoin will do better,” he said. “But it’s also possible that Bitcoin will have no value in the next few years, and I don’t think the same will be true for gold.”

One thing is clear, Wall Street's attitude toward Bitcoin is different than it was in 2017. "I have changed my mind!" Sanford Bernstein strategist Inigo Fraser-Jenkins wrote in a report on Monday (November 30). He said Bitcoin will not replace gold, but there is room for both, especially in the event of inflation and extreme debt in the future.

“I think it’s complementary,” he said in an interview. “In terms of your gold and crypto allocations, whatever your starting position was pre-pandemic, I think it should be significantly increased now.”