The Bitcoin sell-off likely played a key role in increasing the attractiveness of gold


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May was a test time for cryptocurrencies like Bitcoin (BTC). The flagship digital asset was already surging after rising to nearly $ 65,000 in mid-April due to profit-taking sentiment among traders.

Elon Musk accelerated the sell-off by reversing his company’s plans to accept Bitcoin as payment for Tesla’s electric cars.

Later in the month, the People’s Bank of China reaffirmed the use of virtual currency for payments to the country’s financial institutions. Chinese authorities are also starting to keep a close eye on crypto mining – the process by which computers mine cryptocurrencies like bitcoin.

Further blows to the cryptocurrency sector came from U.S. tax and monetary authorities, including Federal Reserve Chairman Jerome Powell, who indicated that further regulation is needed.

All in all, the spate of negative updates resulted in the cryptocurrency market dropping more than $ 500 billion in May. As a digital benchmark asset, Bitcoin also suffered from aggressive downward pressure, falling 35.50% for the month.

Bitcoin is undergoing a sharp turnaround on its monthly charts after the crash in May. Source: BTCUSD on TradingView

Meanwhile, physical gold exchange traded funds (ETFs) had their strongest months since September 2020 in May 2021. Funds worldwide moved, according to the World Gold Council (WGC).

In detail, US gold ETFs recorded an inflow of $ 2.1 billion. The European gold ETFs reported deposits valued at $ 1.6 billion. That said, Asian funds tracking the price of the precious metal saw an outflow of about $ 300 million.

Flow chart for gold ETFs. Source: WGC

The strong demand for gold ETFs also contributed to the rise in spot prices. As a result, the XAU / USD exchange rate rose 7.6% to $ 1,912.785 an ounce in May.

Negative correlation

The opposing moves in the Bitcoin and gold markets suggested that a short-term negative correlation was brewing between them. Additionally, Wall Street veterans Nick Colas and Jessica Rabe wrote in their DataTrek Research report that the sell-off of virtual currencies may have made gold more attractive to institutional investors.

The market strategists predicted Bitcoin as a riskier alternative to gold. Meanwhile, they found that the value of the precious metal will not fall by half in five weeks due to Elon Musk tweets, nor will it respond to threats from policymakers to ban it.

“Gold is a no-drama investment compared to virtual currencies. [Therefore], we continue to recommend a 3-5 percent position in gold for diversified portfolios. “

Bitcoin is largely a speculative bet for wealthy and small retail investors looking to make quick profits. But the fixed supply of BTC has also benefited from fears of rising inflation, much like gold. Companies like Tesla, Ruffer Investments, Square, and MicroStrategy have included Bitcoin on their balance sheets.

They did this to offset inflation risks posed by the Federal Reserve’s unprecedented expansive policies, including near zero interest rates and a $ 120 billion monthly asset purchase program.

The high-profile investments played a key role in doubling bitcoin prices in the first quarter of 2021, which was further fueled to around $ 65,000 by mid-April by a surge in leveraged betting and the influx of new retailers into the market.

Gold ETFs, on the flip side, reported six months of consecutive outflows through May 2021. JPMorgan analysts reported in January 2021 that gold ETFs lost about $ 7 billion over the same period in Grayscale Bitcoin Trust (GBTC), one of New York-based trust Grayscale Investments attracted $ 3 billion.

The lack of capital injection in precious metal funds also lowered their cash bids; XAU / USD closed the first quarter of 2021 down 10.14% compared to Bitcoin’s 100% returns.

In May 2021, another JPMorgan report suggested that large institutional investors had secured their profits in Bitcoin to look for opportunities in gold. They cited open interest data in bitcoin futures contracts on the Chicago Mercantile Exchange, which saw the biggest drop since October 2020. JPMorgan analysts said:

“The picture of Bitcoin flow continues to deteriorate, suggesting continued cutbacks by institutional investors.”

Bitcoin (orange) developed in the opposite direction to gold (pink) until 2021. Source: TradingView

The statements also appeared as Ruffer Investments, a UK-based fund that manages approximately $ 33.95 billion for wealthy individuals and charities, also announced on Tuesday that it was running down its entire Bitcoin position and generating $ 1 in profits , Raised $ 56 billion.

Duncan MacInnes, investment director at Ruffer, told the Finance Times that they had switched the funds into gold, commodity stocks and inflation-linked bonds.

Macinnes added that Bitcoin was still “on the menu” of Ruffer’s potential future investments, noting that the world is desperately looking for new safe havens against extremely low bond yields.