Bitcoin versus Gold ETF

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15 Mar 2024

abstract

The Bitcoin Exchange Traded Fund (ETF) after much reluctance was finally approved by the US government. This represents a major milestone for the crypto currencies market as pension plans and other long term investment portfolios will now be allowed to allocate a portion of their capital into Bitcoin. Bitcoin has long been associated with digital gold, in this article we will discuss this relationship and its implications on what could be expected to the price of Bitcoin over the next decade. I recently created an aggressive crypto portfolio that could transform a $25,000 investment into $1,000,000 within a year and a half. This portfolio contains a portion of Bitcoin as part of the growth strategy. For frequent changes to the portfolio, I will keep my community informed on x.com/Crypto_Rookies.
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Introduction

Every four years, the crypto industry undergoes massive growth until the market crashes again. If timing follows previous patterns, the next crash may be somewhere after mid 2025. Until then, it is likely that momentum from Bitcoin & Ethereum ETF will fuel early growth into the market. As well, the GAAP accounting rules will be modified to be more favorable to crypto assets, and finally the US election will be occurring which could mean additional liquidity into the market fueling high risk assets. Overall, we can expect sustained growth for the Bitcoin and upcoming Ethereum ETF that may outlast a single 4 year crypto cycle.

Supply Side: Gold versus Bitcoin

Gold over the past 100 years has experienced an increase of supply of approximately 1.8% per year. Given the increased demand (50%+) primarily driven from the creation of jewelry, not necessarily driven by the Gold ETF, the price had to go up. We have to be aware that gold production may fluctuate, and that the existing supply of gold is never truly lost, and is unlikely to ever stop increasing. After all, if the supply of gold on Earth is ever maxed out, there is always the possibility of asteroid mining as technology and our will to mine it increase.
Meanwhile, Bitcoin’s supply production reduces by half every 4 years until a maximum of 21,000,000 BTC has been mined. Between 2020 and 2024, there should be 1,312,500 new BTC mined from 18,375,000 which represent about 1.79% per year (very close to Gold production). However, the next halving expected to occur in April 2024 will see this production reduce to 0.89% per year (between 2024 and 2028), and then 0.44% per year (between 2028 and 2032), etc. There has never been a financial asset that behaved in this manner in regard to supply restriction in the history of the world.

Demand Side: Gold versus Bitcoin

Gold has physical properties that make it valuable in electronics and the laws of physics prevent any other materials to behave the exact same, so Gold is not easily replaceable. Meanwhile, Bitcoin could in theory be duplicated, and there have been thousands of new crypto currencies created in an attempt to take over market share from Bitcoin, the closest competitor being Ethereum. Bitcoin is valuable especially in countries with unreliable inflation and government-backed currencies, other currencies attempting to take market shares from Bitcoin would have to achieve better stability and growth compared to Bitcoin which is truly what these users are seeking. Overall, it comes down to how strong the network effect behind Bitcoin is compared to new digital currencies that aim to dethrone it.
Gold and other commodities are often used as refuge assets during periods of economic downturn or uncertainty. Meanwhile, Bitcoin has historically been correlated as a high risk asset that tends to perform poorly during these times. However, ever since the banking collapse of 2023, Bitcoin has started to de-correlate to the S&P/Nasdaq, it remains to be seen if BTC will start to heavily correlate to Gold as a refuge asset.
Given a long enough timeline, it is not impossible to see cryptography being broken by quantum computers, this could be the death of Bitcoin as we know it or requiring an upgrade to quantum resistant cryptographic keys, note that this would also mean our entire financial system would collapse since banks are all digital nowadays. I would argue we shouldn’t worry too much about a drop in demand coming from a weakness of cryptography, at least not at the present time.
Additionally, in order for Bitcoin to be reliable as a store of value, it needs to act as a hedge against inflation, as well as providing enough stability for users to feel safe when they need their capital to make purchases. Historically speaking, this latter feature has not been achieved yet, in the last bear market of 2021, Bitcoin lost 60% of its value, and yet it survived better than its so-called competitors who lost more than 90% of their value, which demonstrates the power of a network effect. What can fuel this network effect for Bitcoin is the various colliding events mentioned earlier which is the US election which is likely to lead to new capital in the market to fuel growth in all risk assets such as crypto currencies, as well as the upcoming changes to the GAAP accounting rules to account for crypto-assets at their fair market value, which is likely to lead to more companies to allocate a portion of their treasury into crypto-assets as a hedge against potential devaluation of US dollars or other government-backed currencies in the event of an economic recession. Finally, the ETF for Bitcoin and Ethereum is likely to fuel a massive demand as pension plans and long term institutional holders decide to allocate a portion of their funds into the ETF.
With that said, we have to remain on the lookout for eventual crypto-assets that could be better as a store of value in regards to stable growth to fight inflation, which is truly what Bitcoin is all about. Even if such an asset comes into light, it would take years for the network effect supporting Bitcoin to be disrupted, and if a circular economy around Bitcoin gets saturated at the world stage, it would be even more difficult for new entrants to gain market share.
When the first Gold ETF was launched in 2004, there was little competition amongst the ETF’s issuers, nowadays with Bitcoin, there are 11 competitors that will attempt to attract investors’ funds and they are all reducing their fees to attract capital. We could expect between $2B and $100B of capital flowing into the Bitcoin ETF’s in 2024. As an order of magnitude, on Jan 10, 2024, Bitcoin price went from $46,694 to $47,906 in a matter of minutes on fake news that the SEC approved the ETF. This was composed of a net volume of 3000 BTC (source: TradingView) which accounted for ~$140M, so what would billions of net inflow cause in terms of price appreciation? Exchanges and market makers may not have enough reserves to fulfill the potential demand and if sellers decide to wait, this could lead to a liquidity crunch that in turn would cause an exponential price appreciation. There is a large amount of liquidity around $50K, but this could be fake orders to trick market participants into shorting around $50K only to get liquidated shortly after. While there are many unknowns, $140M of net inflow causing a market cap appreciation of $23B shows that pump and dumps and market manipulation are very possible. Do the ETF’s issuers like Blackrock already have accumulated a reserve of BTC to sell to their clients, or they have to buy it entirely from the market? There is nothing preventing them from having accumulated a reserve of BTC for the past several months in preparation for the approval to act as a buffer to prevent them from having to buy from the market at the wrong time.
Bitcoin’s reserves on exchange are on a downward trend, and could get a lot worse.
source: CryptoQuant

Summary

While there may be large price fluctuations when the Bitcoin ETF gets approved, I would expect a long term growth trend that could last several years and bypass another large crypto market collapse in late 2025, or at least Bitcoin itself and other crypto ETF could survive a downtrend a lot better than ever before. Overall, while Bitcoin is still not a replacement to gold, it could prove to be closer to an alternative in the future even though it was much more similar to a high risk asset for the past few years. Although it is in no way financial advice, I personally aim at a peak of around $250,000 per Bitcoin by mid-2025. In conclusion, based on the facts discussed above, I do not believe we can extract real prediction power from the Gold ETF as it compares to a Bitcoin ETF, the main reason being that about 50% of the demand for Gold is about creating jewelry piece, and the ETF has little to do with increasing the overall price of gold. With that said, a Bitcoin ETF is another source of demand for Bitcoin, which is more than welcome and should have an impact given the scarcity of the asset.

About

Crypto Rookies is a crypto investor, serial entrepreneur in Artificial Intelligence and Web3/crypto with expertise in tokenomics and market making. Currently CEO of Smooth, which is a Market Making as a Service infrastructure designed to prevent economic collapse of crypto-currencies.
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