Money is flowing into Bitcoin. Some of it is retail investors. A lot of it is early institutional investors.
But a good deal more could end up coming directly from gold itself...
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Gold outflow
Bitcoin is digital gold. So when does it start to take a significant market share away from gold?
We can’t audit the total supply of physical gold currently available to the market but rough estimates put its market size between $9 trillion and $12 trillion.
That’s a lot compared to the $355 billion market cap of Bitcoin.
As of today BTC is about 3.4% of the size of gold. We are only at the start of the 3rd halving though.
Let’s wind back a bit:
During the second halving BTC stabilized around 2% of the market size of gold.
By the end of the first halving BTC was only a fraction of a percent of gold.
Four years before that there was nothing...
Of course Bitcoin and gold aren’t the same. They have different market dynamics.
Something they have in common is that they are both hard money. As such they are both tools to be used as a hedge against fiat currency debasement.
That means there is a common factor driving both assets higher when valued in US dollars. After all, asset price inflation is affecting almost every financial asset.
Baseline money printing will lift all boats. You can thank your local central bank for that.
But one big difference between gold and Bitcoin is that gold has been around for a while. A long long while. As a consequence most investors who want to have an exposure to gold already have it.
That’s particularly true for large investors.
Sure they might choose to add to their gold positions as a hedge against inflation but I’d wage that the demand is unlikely to be massive. And don’t forget that it is always possible to ramp up the supply of gold if there is sign of sustained demand.
By contrast, Bitcoin is at the start of its adoption curve. Most large investors have zero exposure to it. Getting off zero is going to bring a large inflow of cash into Bitcoin.
And you can’t ramp up the supply of new BTC.
Actually the opposite is happening. With each halving you have less new supply at a time when the demand is set to increase.
Consider that MicroStrategy, a modestly sized public company, is investing more than $1 billion as a Bitcoin treasury play… this is just the beginning of the wave. The buying pressure is going to be intense.
That means if investors want to get their hands on any significant amount of Bitcoin they’ll have to bid the price high enough that hodlers will judge it’s a good deal for them.
Who knows how high that might be...
That’s why even if gold is doing well in an environment where investors fear inflation, Bitcoin will do better.
So we can expect two things.
Gold will continue to melt when priced in BTC.
Over long periods of time Bitcoin will continue to be uncorrelated to gold.
If Bitcoin can settle above $100,000 by the end of this halving cycle, it will be about 20% of the market size of gold.
It is hard to tell if getting there really requires people to divest from gold and re-invest in Bitcoin instead.
That seems to be the thesis proposed by JPMorgan but there are different paths.
Here are some other possibilities off the top of my head:
New investors who don’t have any exposure to gold start buying Bitcoin. As far as I know MicroStrategy didn’t hold any gold on their balance sheet. They decided to convert cash to Bitcoin, not sell their gold for it.
Investors choose to hold both gold and Bitcoin at the same time to hedge their bet on hard money. Don’t forget that buying BTC is an asymmetric bet. You don’t need to allocate a huge portion of your portfolio to enjoy nice returns. So for a time, institutional investors might reason that they don’t want to sell their gold “just in case”.
However when we’ll reach the point where Bitcoin is 20% or more of the gold market I can’t see any other way.
To gain the next few trillions BTC will need to steal directly from gold, there is no way around it.
Backing Bitcoin
We’ve focused a lot on MicroStrategy’s Bitcoin treasury move as coming directly from the mind of Michael Saylor.
But MicroStrategy has investors. So at least the largest shareholders need to have backed this Bitcoin strategy.
Here is a great thread by Ellie Frost on who are those investors backing Bitcoin treasuries:
You should go read the whole thread, but some of the key takeaways from that are:
BlackRock, Renaissance Technologies and Russell Investments are large shareholders of MicroStrategy.
These are the usual suspects that are showing a growing interest for Bitcoin.
Those large shareholders obviously are involved in many other businesses. They might use the success of this MSTR Bitcoin treasury program to advocate other public companies doing the same.
This is good for Bitcoin.
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
Done? That’s great! Thank you and enjoy.