Not long ago, there were widespread agreements that Bitcoin had replaced gold as the primary alternative asset. At the time, Bitcoin cheerleaders claimed cryptocurrencies to be a viable store of wealth, a hedge against inflation, and an efficient non-central-bank-influenced currency to facilitate transactions worldwide.
It has proven to be none of those things.
Throughout the majority of the last decade, we've been bombarded with arguments from younger investors as to why cryptocurrencies are the new gold. Still, the crypto collapse followed by the FTX fiasco has been a good reminder that the grass isn't always greener on the other side of the fence.
Bitcoin Is a Risk Asset Because of Counterparty Risk Exposure
The high correlation between Bitcoin futures and the Nasdaq 100 futures suggests the most prominent cryptocurrency is nothing more than a risk asset that generally moves in sympathy to tech stocks.
Imagine business owners trying to barter shares of Facebook (FB) or Alphabet/Google (GOOGL) for services rendered. The asset volatility would create an impossible operating environment for any enterprise. Accepting payments in Bitcoin isn't any more viable.
Systemic financial threats encourage investors to liquidate their crypto assets to move into something with less counterparty risk. Perhaps the high correlation between cryptocurrencies and risk assets such as Nasdaq stocks lies in the fact that the crypto market is plagued with counterparty risk.
Counterparty risk is the probability that the other party in an investment or trading transaction may not fulfill its part of the deal and may default on its contractual obligations. In other words, the risk of a brokerage firm failure negatively impacts the safety of its clients' deposited funds; this is counterparty risk.
Such risk occurs before, during, and after trades take place. As a result of this risk, when economic risks are on the rise, the comfort in holding crypto declines due to the possibility for contagion liquidation and the possibility of brokerage firm failures ticking higher.
Chart Source: QST
Those trading cash market Bitcoin find some comfort in holding their crypto in decentralized wallets that are temporarily immune from counterparty risk, but to use or withdraw the asset counterparty risk is inevitable. As FTX customers learned, it can be potentially devastating.
On the other hand, gold investors can gain exposure through various methods that involve little to no counterparty risk. For instance, counterparty risk is something futures traders rarely consider because they participate in a marketplace with organized funds protection and regulated market integrity.
Similarly, gold ETFs are generally SIPC protected. Finally, although those holding physical gold face storage, shipping, and liquidity challenges, they are usually not exposed to counterparty risk.
Bitcoin Is Not Trading Like a Currency
Bitcoin has been rendered nearly useless for transactional purposes, at least for legally operating enterprises. This is because businesses and their customers attempting to use cryptocurrency for day-to-day transactions face poor liquidity (wide spreads between the bid price and ask price of the asset).
Accordingly, Bitcoin is no longer trading as if it were a currency. This is a tell-tale sign that the market doesn't believe crypto assets are currencies at all. Yet, the gold market, despite the obvious obstacles to being a good transactional asset, remains negatively correlated to the U.S. dollar. In other words, as poor as gold is as a transactional currency, the market is still pricing it as such.
For much of 2021, the U.S. Dollar Index was trading in the 90.00s, and interest rates were non-existent. As a result, both gold and Bitcoin were free to fluctuate on non-currency-related fundamentals and speculative opinions. Yet, everything changed when the dollar soared sharply in early 2022 on the heels of the Russian invasion of Ukraine.
Inflationary threats forced interest rates higher in the U.S. to trigger dollar buying due to the interest-rate differential (higher rates in the U.S. vs. most other developed nations) and a flight to quality move toward the greenback. That seemed to be the nail in the coffin for the Bitcoin-is-a-currency trade.
Since September 2022, the dollar has been chiefly in freefall. While gold has rebounded as expected due to the natural negative correlation with the U.S. dollar, Bitcoin has failed to reprice accordingly.
Bitcoin Has Bounced, but 2023 Rallies Won't Be Like Previous Ones
Not surprisingly, the move from a low-interest-rate regime to one of higher rates has taken the wind out of the Bitcoin sails. A weaker dollar and low-interest-rate environment open the door to rampant speculation in assets that aren't as attractive when yields are higher.
Simply put, when investors can receive a nearly risk-free 4.5% in Treasuries, holding non-interest-bearing assets with substantial price risk is more difficult to justify. The same can be said of gold but to a much lesser degree. This, too, suggests the market is backpedaling on the idea that Bitcoin is, 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 don't see any intrinsic value in Bitcoin itself; the value the market has assigned to it is speculative in nature and difficult to rationalize, in my humble opinion. Thus, any attempt to predict where it might go from here is strictly based on technical analysis, otherwise known as repetitive human behavior. With this in mind, despite the recent signs of life in Bitcoin, I believe the odds favor lower highs and lower lows.
Going forward, Bitcoin rallies likely won't be of the same caliber as those witnessed in 2020 and 2021. After all, there will be an absence of government and Fed stimulus, the M2 money supply (basically the accumulated cash and money market balances) is ticking lower, and the effects of the FTX fallout will deter the same type of euphoric speculation.
Chart Source: QST
Although Bitcoin trades around the clock and on weekends, the futures contract version of the asset closes on Friday before opening back up on Sunday night. The closure enables the futures chart to depict price gaps between weekly sessions.
We can see in the chart above that Bitcoin gapped higher in December 2020, from about $25,000 to $26,000, and gapped lower in June 2022, from about $28,000 to $27,000. We interpret this as the line between a bull and bear market lies in the mid-to-high $20,000s. Specifically, we see resistance near $23,000 and again near $28,000. We wouldn't expect trade into the $30,000 handle; if it occurs, we will reconsider our bearish analysis.
In the meantime, those two levels should be considered cautionary for anyone holding bullish exposure in Bitcoin. We believe the path of least resistance is lower, with prices as low as $7,000 to $8,000 being a possibility sooner than most market participants believe possible. In the meantime, two trendlines 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 trade, but it feels like a relatively stable asset compared to Bitcoin. Nevertheless, last year's skyrocketing dollar and risk-asset selloff triggered a liquidation event in gold as traders needed to raise cash to allocate funds toward yielding assets, meet margin calls, and safeguard capital. The liquidation volatility pushed prices below an uptrend line that dates back to the summer of 2018.
Despite spending over two months below the trendline, gold futures have rallied above it. Similarly, we saw the market fall below its 200-day moving average but is now decisively above it. In our view, this suggests the previous pattern is now in play, and the uptrend line will continue to hold as the market prepares for a run to much higher prices.
Specifically, with the RSI (Relative Strength Index) running a little hot near 70.00, a pullback to test the trendline somewhere between $1,830 and $1,800 is in play but likely to hold. If so, we would expect prices to make their way to $2,100 and if broken, a run to $2,600 is a real possibility!
Bottom Line
Gold has gotten its shine back after slumping for much of 2022, but Bitcoin hasn't enjoyed the same caliber of a recovery. In my opinion, this puts the theory of crypto replacing gold as the primary alternative asset to bed, at least for now.
