Are Gold Investors Also Bitcoin Investors?

[This article appears in our May issue of ETF Report.]

During bitcoin’s heyday two years ago, there was a lot of discussion among market observers and participants on whether the cryptocurrency was replacing gold as a favored alternative investment.

There are similarities between the two: Both are decentralized, are nondollar forms of currency and can be traded anonymously. But with bitcoin’s 80% drop in value from its record highs in the vicinity of $20,000 per bitcoin in late 2017, some are skeptical whether the cryptocurrency really has some of the key attributes ascribed to gold—namely as a store of value and an insurance policy in troubled times. Bitcoin now trades around $5,100

Now that bitcoin’s had its day of reckoning, investors’ views toward it as a “digital” gold are evolving. Several market watchers say there’s a little crossover between gold and bitcoin investors, but only when gold is used tactically. Strategically, however, gold retains its title as a top insurance policy in times of trouble. Still, some sources say, as bitcoin and cryptocurrencies mature, they could become digital safe havens once they prove to be less volatile.

Study In Contrasts
In many ways, gold is not simply an investment. People often have an emotional attachment to it, in part because of its 5,000-year history as a store of value, outlasting other investment vehicles over time.

By contrast, bitcoin has only been around for about 10 years. Will Rhind, CEO of GraniteShares, which issues the GraniteShares Gold Trust (BAR), says people’s attitudes about the similarities between gold and bitcoin evolved as the cryptocurrency’s price rose in 2017.

“You’d have people saying, ‘Well, it’s not about the actual coins, it’s about blockchain technology.’ And when the price took off, people started saying, ‘It’s not about the technology, it’s about the coins,’ Rhind said.

“But the one thing that was always going to be a big problem was the idea bitcoin is a store of value. While the price of gold clearly fluctuates, it doesn’t fluctuate like bitcoin. Over a longer period of time, gold has a similar volatility to the S&P.”

While many types of people own gold, there’s a completely different investment philosophy between traditional gold buyers and bitcoin buyers, Rhind says.

“The majority of people who buy gold are of a more conservative nature, and so look at gold as primarily a risk management tool to hedge risk,” noted Rhind. “That’s a fundamentally different mindset from somebody who’s looking to speculate and take advantage of a potential price movement up.”

Rising prices change people’s attitudes toward an asset, even something as staid as gold. The yellow metal attracted its own share of speculation and price froth in 2011, when values spiked to over $1,900 an ounce, only to see that value nearly halved by late 2015 when prices fell below $1,000/oz. Gold now trades around $1,300/oz.

Tactical Play
Vern Sumnicht, founder of family wealth management firm Sumnicht & Associates, and iSectors, an ETF investment strategist firm, says he owns gold, silver and bitcoin. He says a lot of investors were likely hurt during bitcoin’s price drop and may be out of the market.

He owns gold and silver in coin form, rather than as ETFs, and sees his precious metals as insurance policies in case of economic distress. The bitcoin he holds, which he says is a small amount, is more for speculation.

“Personally, and I think most advisors—and investors do, too—think of gold and silver as a much different animal than bitcoin,” he said.

How investors hold the metal in a portfolio may influence their views on it. Gold investors who use gold ETFs may own the investment to get tactical exposure to the metal’s price without the hassle of storage. Those investors would be more likely to switch between the metal and bitcoin versus those who own bars or coins, Sumnicht says.

“Maybe people would switch between ETFs and bitcoin, because in a sense, [ETFs can be used more for] speculation than they are insurance money,” he added. “If I’m going to buy gold in an ETF, I’ve got a pretty good intention that, when gold goes up, I’m going to probably sell it. I want the bullion to be liquid and moveable.”

Different Animal
David Morgan, author of the precious metals newsletter The Morgan Report, says he thinks while some gold investors may switch between gold and bitcoin, silver investors are heavy traders of cryptocurrencies.

Although he only has anecdotal evidence, Morgan says multiple wholesale and retail metals dealers have told him that silver investors would bring in so-called monster boxes, containing 5,000 ounces, sell them for cash and buy bitcoin, and vice versa, to take advantage of price movements.

“The silver investor is a different animal than a gold investor for the most part,” said Morgan. “They’re much more willing to assume a high-risk profile, which is similar to bitcoin. If you look at a bitcoin chart and a silver chart, the volatility is the same.”          

Mike McGlone, commodity strategist at Bloomberg Intelligence, says he believes bitcoin will eventually be viewed as a digital gold with all the attributes of the metal, but it’s not there yet because the volatility is too high.

“This concept where you can leave a country with a lot of your wealth on a thumbnail drive, this rapidly advancing technology is helping to increase our lifestyle,” he said “It’s like gold. You’re not really using it to buy coffee, and probably never will, but as a store of value, to move your currency, it’s indisputable. Bitcoin has way too much volatility, which is a problem at the moment. But that to me is part of the evolution process.”

McGlone sees another similarity that bitcoin shares with gold. Now that the cryptocurrency is 80% off its highs, “the fever has broken,” and people aren’t interested as much in it.

It’s similar to when silver in April 2011 and gold in September 2011 hit all-time nominal highs, then fell sharply into bear markets, leaving a lot of speculative traders licking their wounds. Bitcoin is likely going through the same thing.

Gold Due For Uptick?
The primary purpose for bitcoin now is using it to trade cryptocurrencies rather than move between traditional asset classes, he says, and it’ll be a while for the market to work off the froth of 2017, just as gold has been stuck in a range for the past four years. 

While bitcoin is largely being ignored, McGlone says he’s seen more trading interest come back to gold ETFs.

It’s impossible to tell if these buyers were previously bitcoin holders or not, of course, but McGlone traces the increase in total gold ETF holdings to when the Fed started to raise interest rates. Since 2015, gold ETF holdings measured in ounces is up 56%, while the spot price of gold from that time is up 21%, he says.

He attributes the greater interest in gold to some investors seeking portfolio diversification, especially after the fourth quarter stock market break, but also for gold’s role as an insurance policy amid economic uncertainty.

“They see increasing risk from the U.S. administration. They keep rapidly increasing the deficit, rapidly increasing the trade deficit,” and gold benefits from that, McGlone says.