Bitcoin's Normal, Healthy Price Slide
Friday, 6/04/2021 09:01
Out of crypto, into gold apparently...
ONE of the biggest reasons why people invest in assets like gold, Bitcoin and altcoins is because they offer to act as hedges against bad government policy,
says Frank Holmes at US Global Investors.
Look at Venezuela. The beleaguered country's currency, the Bolivar, isn't worth the paper it's printed on due to draconian socialist policies. As such, an outsized percentage of Venezuelans rely on Bitcoin as a store of value and to help make ends meet.
A less severe example – though no less impactful – is Canada. In case you haven't heard, there's a new bill being considered, C-10, that some critics worry could lead to the Canadian government's regulation of the content you post on YouTube, Facebook and other social media sites.
Although the bill's main advocate, Heritage Minister Steven Guilbeault, has tried to make it "crystal clear" that the government seeks only to oversee "professional" content creators and not everyday social media users, fears persist that people's freedom of speech is in jeopardy.
Even Google, which owns YouTube, has voiced concerns. "We remain concerned about the unintended consequences, particularly with regards to the potential effects on Canadians' expressive rights," the company said in a statement.
This is precisely what members of the crypto community call FUD, or fear, uncertainty and doubt.
Normally used to refer to something or someone who tries to spread negative information about crypto (Elon Musk?), FUD also summarizes how Canadians feel about the proposed legislation.
Speaking of Elon Musk, investors yanked $98 million out of Bitcoin investment products in the last week of May, the most on record, after the Tesla chief announced in a tweet that he was suspending vehicle purchases using the cryptocurrency. This amount was enough to offset net inflows of $48 million into all other digital asset funds. Ether funds, for instance, attracted $27 million, bringing the crypto's weekly trading volume to an incredible $4.1 billion, the most ever, according to CoinShares.
Bitcoin came under pressure from more than just Musk's distorted comments on its energy usage. The Chinese government has also cracked down on the crypto ecosystem, banning financial institutions from providing services related to digital assets. A hotline has even been set up in one Chinese province that people can use to snitch on neighbors they suspect of mining cryptos.
Of course, this is only the 10,000th time China has come out against crypto. More FUD.
That week's selloff was dramatic. By the Wednesday, Bitcoin was down more than 40% from its all-time high of $64,000, set in mid-April. The token's market dominance fell to a three-year low of 40%.
I believe the pullback is healthy. It's important for investors to remember that this kind of volatility is normal for such a still-emerging, speculative asset class. It's also important to keep things in perspective: Bitcoin is still up more than 30% so far this year, 315% for the 12-month period.
So where have all the millions that have flowed out of crypto funds gone to? Would you be surprised to hear gold?
According to an analysis of CME futures contract, large institutional investors could be shifting away from Bitcoin in favor of gold. "Over the past month, Bitcoin futures markets experienced their steepest and more sustained liquidation since the Bitcoin ascent started last October," J.P.Morgan wrote in a recent note to investors. These liquidations have corresponded with inflows into gold ETFs.
The price of the yellow metal broke through key resistance at the end of May, touching $1890 an ounce for the first time since January on a declining US Dollar. The next test above $1900 will be its all-time high above $2000.
Whereas Bitcoin is a speculative asset, gold is a well-established, highly liquid asset with a centuries-long track record. We know what the price drivers are.
Besides responding to a weaker Dollar, gold is finding traction from ongoing unprecedented money-printing and monetary stimulus. The amount of M2 money circulating the US economy is up about 21% from a year ago. Meanwhile, the Federal Reserve maintains its bond-buying program. As of last week, the size of the central bank's balance sheet was just under a staggering $8 trillion.
Inflation also continues to weigh on investors' minds, improving the investment case for gold. Last month we saw even more data emerge warning markets that prices could be headed higher in the near term.
For one, input prices for manufacturers in the Philadelphia region accelerated at their fastest pace in over 40 years. The Philly Fed's prices paid diffusion index rose to 76.8 this month, the highest reading since March 1980. Three quarters of manufacturers reported price increases while none reported decreases. Expect these higher costs to be passed on to consumers.
Much of the price increases could be related to record and near-record shipping costs. The rate to ship a 40-foot container continues to climb as demand far outpaces supply. The Drewry World Container Index rose 7% during the last week of May to touch $5,193, a nearly fourfold increase from a year earlier.
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