The rise in Bitcoin’s acceptance as an alternative currency is another phenomenon of the COVID-19 era. Demand for an
unconventional and high-volatility hedge has been driven by rich equity and credit valuations; conventional hedges like
developed-market bonds barely serve as insurance at current low yields. Concerns about cyberattacks, climate
catastrophes and materially higher inflation also factor in, particularly with millennials, furthering demand for these
unconventional financial channels.
“Bitcoin has already surpassed gold in risk capital terms,” according to Nikolaos Panigirtzoglou, Senior Global Markets
Strategist. “Current prices are well above our most recent estimates of fair value based on mining cost and risk capital
equivalence with gold.” He observed that just $14 billion of institutional inflows into Bitcoin since September 2020 have
contributed to an $800 billion increase in its market cap. Some of this can be explained by low market liquidity.
Panigirtzoglou estimated that, at $100 billion, the daily trading volume of gold in spot and futures is 10 times the true
trading volume of Bitcoin. Mika Inkinen, Global Markets Strategist, added “We estimate the long-term theoretical
Bitcoin price at $146,000 to match the total private sector investment in gold via ETFs or bars and coins.” Reaching this
would likely be a multi-year process that would depend on far greater institutional Bitcoin ownership and on the volatility
of bitcoin converging to that of gold, he said. So far the opposite is happening, with the volatility of bitcoin rising while
the volatility of gold is falling. At the current bitcoin to gold volatility ratio of around four times (in terms of six-month
volatilities), the fair value for bitcoin in risk capital (i.e. risk-adjusted) terms drops to around $37,000.
The diversification benefits remain questionable at current prices so far above production costs, while the mainstreaming
of cryptocurrency ownership is raising correlations with cyclical assets. “Crypto assets continue to rank as the poorest
hedge for major drawdowns in equities, particularly to fiat currencies like the dollar which they seek to displace” notes
John Normand, Head of Cross-Asset Fundamental Strategy. “To the extent that Bitcoin remains an investment vehicle
rather than a funding currency, it will always lack the short base that sponsors USD, JPY and CHF strength during periods
of acute market stress.”
