November 21, 2023

Will Bitcoin ETFs Kill Gold?

It’s official. Bitcoin could soon become accessible to millions of investors.

On August 29, a federal appeals court in Washington, DC, ruled that the U.S. Securities and Exchange Commission (or the SEC) was wrong to deny Grayscale, an asset manager, the right to list its Grayscale Bitcoin Trust as an ETF.

Now, we can expect that Grayscale is going to list an ETF that would track the spot price of bitcoin.

And retail investors will have easy access to the world’s leading cryptocurrency.

What does it mean for gold?

Read on…

Why Is Bitcoin Compared to Gold?

Both are alternative assets. Neither bitcoin nor gold strictly follow the movements of the broad stock markets.

(However, in the past, bitcoin did behave as a leveraged tech play.)

But, because bitcoin is designed to exist outside of the traditional financial markets, it was promoted as the ultimate alternative asset.

Instead of trading on an organized and centralized exchange, bitcoin’s transactions get recorded on a decentralized ledger, or blockchain.

The ledger works on a global scale, which, in theory, helps bring down transaction costs.

Much like gold, bitcoin is a “thing in itself.” Its value doesn’t depend on the economy or the state of the markets. It is valued based on supply and demand. And one of bitcoin’s selling points was that its supply is limited. Technically, only 21 million bitcoin can exist.

Gold, too, is limited in supply. Most of the gold that exists today hasn’t been mined recently. Instead, investors accumulate gold over decades and centuries. The amount of gold that mining companies produce per year doesn’t change the total supply much.

And, as bitcoin is the newer asset class, it was promoted as a better next-generation alternative to gold. You don’t need to store bitcoin like gold bars or insure it against theft.

All it needs is a blockchain and computers spread all over the world that would verify the transactions happening on the blockchain. (And those who verify these transactions get bitcoin as “payment” for their services.)

So, Is Bitcoin Better Than Gold?

It depends on what you expect.

If you expect your holdings to retain value in the long term, gold is a great option.

Gold has also been proven to move against interest rates. When they rise, the price of gold tends to fall. A recent study showed that there is a -0.82 correlation between gold and interest rates.

It means that higher interest rates act as a headwind for gold, and lower ones are positive for the price of the yellow metal.

Right now, interest rates are high. The latest employment data from the United States points to a cooling labor market, however, which means that the Fed will not likely hike rates again.

Instead, it may hold them steady or even start lowering them in the future if inflation continues declining and the U.S. economy cools down.

That would be good for gold.

And bitcoin?

Much like every other asset, it started falling when interest rates went up.

As we said earlier, it tends to act as a “levered tech play.” And the tech sector has proved to be notoriously dependent on interest rates.

The reason is simple. Technology companies are often unprofitable. They need to borrow money to grow. And their earnings are far away in the future.

This makes them vulnerable to higher discount rates, which interest rates are part of. The higher the rate of interest, the lower the value of a company’s future earnings.

Bitcoin will never have a “profit.” That made the cryptocurrency much more volatile than gold.

Its maximum drawdown, for example, is over 93%. (Maximum drawdown is the largest single drop between the peak and the bottom.) The maximum drawdown for gold is about 46%.

It’s still significant, but it’s nowhere near the almost-total wipeout that a bitcoin drawdown can be.

Should You Purchase the New Bitcoin ETF?

We expect Grayscale to list a bitcoin-based ETF soon.

Should you hold it?

(Please note that this isn’t personal financial advice. Talk to your advisor before making any investment decisions.)

Our position on bitcoin is that it will never be a complete substitute for gold. Bitcoin’s past behavior and its fundamental drivers created a completely different risk-return profile than that of gold.

As a result, if you think that bitcoin has return potential, it may not hurt to hold a small position in your portfolio. It will give you some peace of mind knowing that you are exposed to cryptocurrency without putting too much of your capital at risk.

Here at the Canadian Mining Report, we prefer to protect our portfolios with gold. For extra upside, we consider Canadian mining companies.

It’s your call.

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