Last week, the Bitcoin price rose 40%, which helped push the cryptos market past the $1 trillion market cap. Within the past 12 months, Bitcoin surged about 400%. Social Capital’s Chamath Palihapitiya indicated that Bitcoin could reach $100,000 and further over the course of the next 5-10 years. Because of this success, crypto investors should now reassess their investments and consider taking their profits to buy gold with Bitcoin.
What is Happening to the Bitcoin Price?
For the first time last week, the crypto market crossed over the $1 trillion dollar market cap threshold. The rapid rise in the crypto markets has been mainly attributed to the frivolous monetary policies of governments globally. For example, the US has printed several trillions of dollars over the last 10 months. Although the Democrats are planning on more stimulus checks, $2,000 per citizen is a fraction of what has already been printed by the government and the Federal Reserve.
In fact, the US printed ten times more in 2020 alone than it has printed in the last 100 years prior to 2020. Even the Federal Reserve has increased the size of its balance sheet from $4.3 trillion in March 2020, to a peak of nearly $7.2 Trillion in early June. On top of that, the US Capitol insurrection last week added to the fear, causing an unexpected run to safety by investors.
This frivolous government spending, institutional buying, and socio-political unrest create a perfect market for commodities & cryptocurrencies. For the moment, everyone is buying up cryptocurrencies as safe-haven hedges. Their reasoning? Investors and institutions fear that inflation may soon be on the horizon. Therefore, they are looking at new ways to hedge against inflation and the devaluation of fiat currencies.
Bitcoin Price and Institutional Support
The main reasoning behind the onslaught of demand is that investors no longer trust political leaders with their monetary and fiscal policies. The Federal Reserve and government printing several trillions of dollars indefinitely and the socio-political unrest have created the perfect storm for the cryptocurrency market cap growth. Although this particular crypto crash was most likely a correction, this degree of correction and rebound is not sustainable.
Another major reason why the crypto markets rose significantly over the past few months is as a result of institutions starting to invest portions of their assets in bitcoin. For example, Michael Saylor, CEO of Microstrategy, recently put over $425 million of his company’s cash reserves into Bitcoin. This action replaces holding just dollar reserves for Microstrategy. Since his significant move, he has vocalized his support for cryptos almost nonstop on Twitter. He even went as far as trying to convince Elon Musk to follow suit with Tesla's cash reserves. Saylor’s decision a few months ago has resulted in his $425 million dollar investment to appreciate to over $1.2 Billion. This is thanks to the significant rise in the value of Bitcoin in the past 2 months.
If Tesla, or other institutions like Apple, follow his example, then the price of Bitcoin may continue to spike. Considering the limited supply and shortage of people looking to sell their Bitcoin holdings, the cryptocurrency has limitless support, for now. Paypal also recently announced that they will allow their customers to buy and hold cryptos in their PayPal accounts. They partnered with Paxos to allow retail customers to access the cryptomarkets through their platforms. They are not the first to do this, actually, they followed after other companies such as Square who offer this benefit.
How Do Institutions Buy Bitcoin? How Does This Affect the Bitcoin Price?
All these new retail and institutional demand have been the main catalyst for the rapid rise in the crypto markets. Therefore, they are a major cause of the incredible volatility. When you consider how these companies can eventually take their profits out of Bitcoin, that might paint a better picture of how precarious its value is. Major companies probably will not pull out of Bitcoin now. But, what would happen to the price of Bitcoin if they do?
GBTC stands for Grayscale Bitcoin Trust, which is one of the largest holders of cryptos in the world. This trust allows institutional investors like Saylor and Paul Tudor Jones to buy BTC and ETH on a regulated basis. Institutions monetize the trust's premium by borrowing Bitcoin, putting the tokens in a trust, and gaining shares that have a six-month lockup period. They can hedge the stake by shorting those shares.
Buying Bitcoin through this trust is the only way that major institutions can buy Bitcoin at this time. But, the SEC’s planned introduction of a Bitcoin ETF could deter institutional investors away from GBTC. If approved, this would add competition to this trust and many investors can quickly exit the trust after this lockup period. JP Morgan indicated on January 8th to their clients:
"A cascade of GBTC outflows and a collapse of its premium would likely have negative near-term implications for bitcoin given the flow and signaling important of GBTC."
In the past, many fled to precious metals as a hedge. Today, cryptos offer a similar safe haven to hedge investments against inflation. This appears to be a popular choice now, particularly for young investors breaking into the market. However because of the recent volatility, now might be the right time to rebalance your portfolio. Investors should consider moving profits from cryptos into more stable commodities such as gold and silver or other precious metals.
How Does Bitcoin Affect the Ethereum Price?
With Bitcoin’s meteoric rise, institutional investors are hard-pressed to diversify their assets and look to other investment opportunities. Although Ethereum costs much less than Bitcoin, it routinely outperforms BTC on a percentage basis, similar to the correlation between silver and gold. Although Bitcoin rose about 40% last week, Ethereum increased significantly more. Both were down significantly on Monday, suggesting that placing all your bets on cryptos is not always a wise decision. Analysts are optimistic about the Ethereum price maintaining great support in the long term, especially because of Bitcoin's rise. Considering how major institutions might pull the plug later in the year, that analysis might not hold up.
Support for Ethereum also rose last week, and it actually performed better on a percentage-basis than Bitcoin. Ethereum rose 60% in seven days and broke the crucial level of $1,300 for the first time on Sunday since 2018. The next day, it plummeted below $1,000, making over a 30% drop on the day. Ethereum, although much smaller, also has been seeing some institutional demand and interest through the Greyscale Trust.
How Does Bitcoin Compare to Gold and Silver? Why Should I Buy Gold with Bitcoin?
After surpassing the one trillion dollar market cap threshold last week, the crypto market has seen significant market volatility. Bitcoin and Ethereum fell about 20% on Monday. This caused the crypto market cap to fall over 150 billion dollars in a 24-hour span. Even though some recovery has occurred for both cryptos, this monumental reversal is not the norm for other currencies or commodities. For example, a 20% correction in the gold market would equate to about a $2 trillion dollar loss in the market capitalization. This would require significant selling pressure from the market. Such a correction would be highly unlikely in the gold or silver market. However, this seems to be the norm in the cryptocurrency market.
This massive market drop is a signal that putting all your money in cryptos as a safe haven is risky. Now is the time to get into something more stable. It is in the best interest of investors to take their profits out of cryptos and rebalance with other safe-haven assets. One of the best investments to diversify with is precious metals. You can even buy gold with Bitcoin directly, and add variety to your safe-haven portfolio.
To briefly compare the two safe-havens, Bitcoin is a great investment for short-term potential gain. Gold is a stable investment better for long-term storage. Precious metals proved their functionality as currency through history, and therefore are better as a longer-held asset. Plus, they are rare to begin with, and it takes work to gain access to these rare metals. In conclusion, it is better to diversify, especially if you are worried about inflation. Rebalance your portfolio and enjoy the benefits of both short and long term growth when you buy gold with Bitcoin.
How to Diversify Your Safe-Haven Assets & Buy Gold with Bitcoin
Planning your exit from the crypto market or wanting to diversify your assets is the first step. Knowing the risks of cryptos goes to show that its volatility is dependent on major support. This support can leave at any time. On top of that, if major countries decide to outlaw it, cryptos will instantly become worthless. Because of the extreme volatility, security breaches, regulatory issues, and potential government restrictions, investing only in cryptos is highly risky.
On the other hand, investing in commodities such as precious metals may be a safer environment for your safe haven hedge. Used as a store of value since the beginning of mankind, precious metals withstand the test of time. You can be sure that gold and silver will remain one of the top safe-haven hedges to protect your long-term wealth. Therefore, when you are determining the right move for yourself, be sure to consider all the risks of investing in cryptos, precious metals, and other commodities. Seeing the strong demand for cryptos at this time just might go to show that there could be untapped demand for precious metals. Today could be a good time to exchange your profits from cryptocurrencies to buy gold with Bitcoin. This offers you the opportunity to rebalance your portfolio.