Crypto Long & Short: Is Bitcoin More Like Gold or Equities?

In the recent market turmoil, bitcoin (BTC) did not act like the uncorrelated asset many thought it was. Nor did gold.

As things calmed down a bit (or as we got used to the new volatility), gold resumed its upward climb. But there are problems.

It turns out that gold is not as fungible as we assumed. 

You're reading Crypto Long & Short, a newsletter that looks closely at the forces driving cryptocurrency markets. Authored by CoinDesk's head of research, Noelle Acheson, it goes out every Sunday and offers a recap of the week — with insights and analysis — from a professional investor's point of view. You can subscribe here.

Surging demand combined with refinery closures and shipping restrictions has created a shortage of gold coins and the small gold bars most popular with retail investors. And if you do manage to source one, you’ll pay a premium to the spot price.

According to Bloomberg, spot gold traded at $1,580/oz on Wednesday, while gold coins sold for $1,786/oz and 1oz gold bars for $1,729/oz.

Gold bars and coins normally sell at a premium to spot, but the premium is apparently now more than twice its usual level in some formats, and many dealers have a waitlist. Even the kilobar, a heavier lift (geddit?) for retail investors than the smaller coins and 1oz bars, is at a much higher markup than usual. 

Even larger denominations used for futures settlement are experiencing supply issues. Unusually, the London Bullion Market Authority (LBMA) and COMEX, associations based in London and New York, respectively, that jointly establish the global gold price through the trading of unallocated gold- and cash-settled futures, this week put out a joint statement reassuring the market of their gold stocks. 

Yet, stories have surfaced of COMEX not being able to settle some of its futures contracts with the standard 100oz gold bar and needing to import 400oz gold bars from London. Last week, the CME Group (parent of COMEX) announced a new gold futures contract with settlement in either 100-ounce, 400-ounce or 1-kilo bars. Yet according to BullionStar, as of Friday there were no 400oz gold bars in New York.

There’s so much going on here that we could write a book, but for now it’s worth keeping an eye open for disruption in physical settlement of gold futures. It’s also worth remembering that the bitcoin market may have its problems, but actual delivery is not one of them. 

The end of the first quarter of 2020 this week gives us some nice packaging to wrap around relative performance figures, and an opportunity to look at where the market might go from here.

BTC’s fall was part of a broad market rout, with sharp falls in most traditional asset classes.

As the above chart hints, BTC’s correlation to equities rose sharply, while its correlation to gold fell.

On a longer time frame, however, the BTC/Gold relationship is stronger than that of bitcoin and equities, and we expect this to become the norm again as markets settle into a new outlook.

Unless you’ve been living under a rock recently (which would be forgivable given what’s going on), you’ll have heard of the bitcoin “halving” (or “halvening”). If you’re familiar with bitcoin technology, you’ll know what it is; if you’re not, well, buckle up.

The halving is a fascinating insight into how decentralized incentives can maintain a system of programmatic monetary policy with a hard cap. For a quick introduction, here’s our explainer (with video!). If you want more detail, over 30 charts and some in-depth miner commentary, as well as a look at what the impact on the price could be, download our free report. 

Inside, you’ll see how bitcoin’s technology and its market have an intertwined relationship unlike any other asset class. Its value stems from the resilience of its protocol, which no single entity controls. In the increasingly fragile fiat system, with rules that change according to convenience, this will attract attention even if just for intellectual curiosity.

The halving will hone that attention, as it highlights just how novel bitcoin’s technology is. What’s more, it is happening at a time when fiat currency supply breaks all bounds of control. The juxtaposition is stark, and raises important questions about what constitutes value and how much we should sacrifice fundamentals for convenience. 

While bitcoin’s previous two halvings preceded a strong price rally, we can’t count on this one having the same effect. The bitcoin market is markedly different than it was four years ago, with a different level of institutional involvement, a more sophisticated market structure and a greater relevance in macro trends. The reduction of selling pressure from a lesser flow of new supply may play a part, as might the narrative around the halving and the extra mainstream attention it brings.

Narratives shape sentiment which influences prices, although investors may prefer to wait for fundamentals to become more clear. But if ever there was a time when it was appropriate to focus investor attention on an alternative supply mechanism for a potential store of value, for whatever reason, it is now. 

Binance, the largest crypto exchange in the world in terms of volume, has bought CoinMarketCap, the most popular crypto data site in the sector, in terms of traffic. TAKEAWAY: In an exclusive interview with CoinDesk, Binance founder and CEO Changpeng “CZ” Zhao gave the data site’s large number of users as one of the main drivers of the deal. This hints at a renewed push into the retail crypto investment market, and a possible consolidation in the crypto market sector, with exchanges buying ancillary businesses to broaden their service and reach. It remains to be seen how this changes both CoinMarketCap’s and Binance’s offering and target market – and whether other exchanges follow suit with similar acquisitions.

Binance was also in the news for delisting leveraged tokens issued by derivatives platform FTX, which replicated a long or short position with 3x leverage. TAKEAWAY: The reason Binance gave is that users weren’t reading the small print and didn’t seem to realize that these instruments could lose them a lot of money if not handled correctly. On the other hand, FTX, in which Binance has an undisclosed stake, has not experienced similar issues. This could be because of Binance’s heavily retail user base, while FTX users are probably more sophisticated. Either way, this is an interested example of self-regulation – these tokens were profitable for the exchange in that they generated a significant amount of volume, but, you know, “protecting users comes first.”

Options market data shows a 4 percent chance of bitcoin hitting all-time highs this year, and a 16% chance of ending the year above $10,000. TAKEAWAY: Call and put spreads can be used to calculate the market’s expectations of prices at expiry, but, like all prices, they react to information and are likely to continue to move up or down as expiries near and as traditional market directions become more clear. 

As interest rates drop to zero, how will stablecoin issuers cover their costs? TAKEAWAY: Dollar-backed stablecoin issuers have been making a tidy profit on the interest they earn on the deposited dollars. If that gets totally taken off the table, will they resort to raising fees? Will that impact stablecoin demand, which has been rising as more investors park excess cash in stablecoins rather than fiat currency?

Cryptocurrency exchange data firm Kaiko broke down the March 12-13 bitcoin price movements to highlight the role of liquidity in volatility. TAKEAWAY: Analyses like these help to understand the role of market depth (size of bid and ask orders) in volatility – if bids and asks can be just wiped off the board in a sharp price movement, the movement will become even sharper in the absence of support levels. On March 12-13, market depth got decimated and spreads widened significantly, which exacerbated the price slippage, volatility and sharp decline. 

Analytics firm Glassnode highlights metrics that show bitcoin network activity is recovering after the crash. TAKEAWAY: I love network metrics – to think that we can get an almost-real-time look at what is actually happening under an asset’s hood in terms of movement, accumulation and adoption… The increase of active addresses and number of small transactions suggests that panic is subsiding. And a historical comparison of more esoteric metrics such as net unrealized profit (NUPL) and market value vs realized value (MVRV) hint that the bitcoin price has reached a bottom. 

Coinbase points the finger at leverage in the crypto sector as the main culprit of the March 12 crash. TAKEAWAY: I agree – many accounts claimed that it was due to a fire-sale of any liquid asset to raise liquidity for margin calls elsewhere. While there may have been some of that, we haven’t seen much evidence. And if it were the case, it would imply a much greater crypto presence than we had realized of large institutional investors. Also, it does not make intuitive sense that institutions would exit a highly volatile asset on the way down, knowing it would be difficult to get back in at a similar price, unless they really had no other more liquid and less volatile assets in their portfolio – an unlikely scenario. Leverage in bitcoin derivatives is relatively steep, especially on the larger exchanges, which leaves traders more vulnerable to margin calls than in other assets. And the sharp drop in open interest shows how much the crash affected the leveraged derivatives market. 

After the rout of mid-March, several exchanges have reported a sharp uptick in new user signups. Kraken, for instance, saw an 83% increase in signups, Luno had 50% more active users, and peer-to-peer crypto exchange Paxful doubled its signup rate. TAKEAWAY: Is this a sign of people wanting to hedge against the fragility of the fiat system? Or is it a sign of lockdown boredom, in which anything with sanitary risk holds appeal?

Amid market turmoil and talk in traditional markets of circuit breakers, short-selling bans and even total market shutdowns, there have been some mutterings about applying similar measures to crypto markets. TAKEAWAY: They will forever be just mutterings, though – crypto markets can’t close, no matter what, and that’s a good thing. 

Open-source code platform GitHub has buried the Bitcoin Core code in an abandoned coal mine in an Arctic mountain. TAKEAWAY: To add to the overall apocalyptic feel of the times.... (I’m kidding. Sort of.)