Gold now shines over Bitcoin

Not long ago, there was widespread agreement that Bitcoin had replaced gold as the primary alternative asset. At the time, Bitcoin cheerleaders argued that cryptocurrencies were a secure store of wealth, a hedge against inflation, and an effective central bank-free currency to facilitate worldwide transactions.

It proved to be none of these.

For most of the last decade, we’ve been bombarded with arguments from young investors as to why cryptocurrencies are the new gold. Still, the cryptocurrency crash following the FTX fiasco was a good reminder that the grass isn’t always greener on the other side of the fence.

Bitcoin is a risk asset because it is exposed to counterparty risk

The high correlation between Bitcoin futures and Nasdaq 100 futures suggests that the most prominent cryptocurrency is nothing more than a risk asset that moves in sympathy with tech stocks.

Imagine business owners trying to barter shares of Facebook ( FB ) or Alphabet/Google ( GOOGL ) for services rendered. Asset volatility creates an impossible operating environment for any business. It is no longer convenient to accept payments with Bitcoin.

Systemic financial threats encourage investors to liquidate crypto assets to move to something with less counterparty risk. Perhaps the high correlation between cryptocurrencies and risk assets such as Nasdaq stocks is due to the fact that the cryptocurrency market faces counterparty risk.

Counterparty risk is the possibility that the other party in an investment or trading transaction will not fulfill its part of the agreement and will not fulfill its contractual obligations. In other words, the risk of failure of a brokerage firm has a negative impact on the safety of its clients’ deposited funds; this is counterparty risk.

Such risk occurs before, during and after trading operations. As a result of this risk, when economic risks increase, the convenience of holding crypto decreases due to the possibility of cancellation of contagion cases and a higher probability of brokerage firm failures.

Graphic Source: QST

This trading cash market Bitcoin finds some comfort in keeping its cryptocurrencies in decentralized wallets that are temporarily immune from counterparty risk, but using or withdrawing active counterparty risk is inevitable. As FTX clients have learned, this can be potentially devastating.

On the other hand, gold investors can gain exposure in a variety of ways with little or no counterparty risk. For example, counterparty risk is something that futures traders rarely consider because they participate in the market with the protection of organized funds and regulated market integrity.

Similarly, gold ETFs are generally protected by SIPC. Finally, while holders of physical gold face storage, transportation, and liquidity issues, they are typically not exposed to counterparty risk.

Bitcoin does not trade as a currency

Bitcoin has been rendered almost useless for transactional purposes, at least for legitimate businesses. This is because businesses and their customers trying to use cryptocurrency for day-to-day transactions face poor liquidity (a wide spread between an asset’s bid and offer price).

Accordingly, Bitcoin no longer trades as a currency. This is a sign that the market does not believe that cryptocurrencies are currencies. However, the gold market remains negatively correlated with the US dollar despite the obvious obstacles to becoming a good performing asset. In other words, even though gold is poor as a transaction currency, the market still values ​​it as such.

For most of 2021, the US Dollar Index traded at 90.00 and interest rates were non-existent. As a result, both gold and Bitcoin fluctuated freely on fundamentals and speculative ideas unrelated to the currency. However, that all changed in early 2022 when the dollar rose sharply following Russia’s aggression against Ukraine.

Inflationary threats forced higher interest rates in the US to spur dollar purchases due to the interest rate differential (higher rates in the US than in most other developed countries) and a qualitative move towards the dollar. It looked like a coffin nail Bitcoin is a currency trade.

From September 2022, the dollar is basically in free fall. While gold rebounded as expected due to its natural negative correlation with the US dollar, Bitcoin failed to reprice accordingly.

Graphic Source: QST

Bitcoin is up, but the 2023 rallies won’t be the same

Unsurprisingly, the shift from a low interest regime to one of higher rates took the wind out of Bitcoin’s sails. A weaker dollar and low interest rate environment opens the door to widespread speculation in assets that are less attractive when yields are higher.

Simply put, it’s harder to justify owning interest-free assets with significant price risk when investors can get roughly 4.5% in Treasuries. The same can be said about gold, but to a lesser extent. This indicates that the market is focused on the idea that Bitcoin has replaced or will replace gold as an alternative asset.

Despite the remarkable and undoubtedly game-changing blockchain technology that made Bitcoin and other cryptocurrencies possible, the value of such currencies is still in question. I see no intrinsic value in Bitcoin itself; the value the market places on it is speculative and difficult to rationalize in my humble opinion. So trying to predict where it might go from here relies heavily on technical analysis, otherwise known as repetitive human behavior. With that in mind, I believe the odds favor lower highs and lower lows despite recent signs of life in Bitcoin.

Going forward, Bitcoin rallies will likely not be of the same caliber as those seen in 2020 and 2021. After all, there will be no government and Fed stimulus, no M2 money supply (mainly accumulated cash and money market balances). is going down and the effect of FTX falling will prevent the same kind of euphoric speculation.

Graphic Source: QST

While Bitcoin is traded around the clock and on weekends, the futures contract version of the asset closes on Friday before reopening on Sunday night. Closure allows the futures chart to depict price gaps between weekly sessions.

In the chart above, we can see that Bitcoin rose from around $25,000 to $26,000 in December 2020 and fell from around $28,000 to $27,000 in June 2022. We interpret this as the line between a bull and bear market being in the mid to upper $20,000s. Specifically, we see resistance near $23,000 and again near $28,000. We didn’t expect $30,000 worth of trade; If it does, we’ll revise our bearish analysis.

In the meantime, these two levels should be considered cautious for anyone with upside risk in Bitcoin. We believe the path of least resistance is lower, with prices as low as $7,000-$8,000 a possibility sooner than most market participants think possible. Meanwhile, two trend lines will offer temporary support at $15,000 and $13,000.

Unlike Bitcoin, Gold is poised to move higher

The gold market is known for volatility and irrational trading, but it feels like a relatively stable asset compared to Bitcoin. Nevertheless, last year’s soaring dollar and sell-off in risk assets led to a liquidation event in gold as traders needed to raise cash to allocate funds to income-producing assets, meet margin calls and preserve capital. Liquidation volatility pushed prices below the bullish line dating back to the summer of 2018.

Despite spending more than two months below the trend line, gold futures rose above it. Similarly, we saw the market break below the 200-day moving average, but now it is firmly above it. In our opinion, this indicates that the previous pattern is now in play and the uptrend will continue as the market prepares to run higher.

In particular, as the RSI (Relative Strength Index) heats up a bit near 70.00, the pullback to test the trendline somewhere between $1,830 and $1,800 continues, but is likely to continue. If so, we expect prices to reach $2,100 and a break to $2,600 is a real possibility!

Graphic Source: QST

Bottom line

Gold has regained its luster after falling for most of 2022, but Bitcoin hasn’t enjoyed the same improvement. In my opinion, this puts the theory of cryptocurrency replacing gold to bed as a major alternative asset, at least for now.