Why JPMorgan Thinks Nothing Can Stop It Now
Marc Andreessen famously said that “Software is eating the world” and his article became one of the most seminal pieces of writing on tech in recent memory.
Well software ate the world, and Bitcoin is about to start eating traditional finance frameworks (with Ethereum in toe).
Ironically Andreessen has a lot to do with this, as the founder of ‘a16z’ one of the world’s leading venture capitalists he has been a frontier investor into many of blockchains best use-cases so far such as DeFi (decentralised finance).
Now JP Morgan is catching up to the slick Silicon Valley VCs.
‘Flows and Liquidity’ the weekly Global Markets Strategy published by JP Morgan kicked off the year on January 4th by posing the question, “Has bitcoin equalised with gold already?”
It’s a fascinating question, and one that undoubtedly needs some consideration but before we do – who in their right mind would have thought we would be here already? America’s largest investment bank openly and publicly questioning whether Bitcoin is already the equal to one of the world’s most robust assets.
It makes my mind spin, but the reality is Bitcoin itself has forced this conversation to happen, not the other way around.
Why are Bitcoin and Gold thought of together?
Bitcoin’s relativity to gold is to do with its challenge as the superior inflation hedge. Bitcoin is often referred to as digital gold due to holding similar characteristics such as; scarcity, how the assets are produced (both are ‘mined’), and the key similarity is that both markets perform well with a weakening USD market.
“Bitcoin’s competition with gold has already started in our mind as evidenced by the more than $3bn of inflows into the Grayscale Bitcoin Trust and the more than $7bn of outflows from Gold ETFs since mid-October (Figure 1).” JP Morgan, Flows and Liquidity, 4th of January 2021.
There is little doubt that this competition with gold as an “alternative” currency will continue over the coming years given that millennials will naturally become a larger component of the investors’ market and given their preference for “digital gold” over traditional gold.
JP Morgan estimates that the market cap of gold, excluding central banks holdings, is around $2.7T, while the Bitcoin market cap currently sits around $622B, with each unit currently valued at $33,500USD.
This would mean that Bitcoin would need to increase 440% from here to $146K USD a unit, to match the total private sector investment in gold via ETFs or bars and coins.
The report goes on to say, in almost a disclaimer to the above price target that in order for Bitcoin’s market cap to equal that of gold then the volatility will need to converge to become more akin to the relatively stable gold.
“It is thus unrealistic to expect that the allocations to bitcoin by institutional investors will match those of gold without a convergence in volatilities.”
It is clear based on figure 1, that the institutional flow is what clearly differentiates this melt-up compared with the previous run 2017. But what about the retail investors, are they sitting out this run or are they still to come?
One way to gauge retail interest is to monitor the purchases made on PayPal by looking at itBit volumes (which is the exchange that PayPal uses). You can clearly see a marked ramp up from mid-December which peaked on January 7th, which was a record for PayPal ($125m daily volume).
Time will tell if this retail buying mania continues in the same trajectory or if it tapers off. The market is looking a little weary after an enormous start to 2021, but the backdrop is still very much set for a very strong year.
The key levels from my last note (Bitcoin Bull Run) are still holding, with $28K USD being the support level to keep your eye on most closely.