The debate whether bitcoin is stealing gold's market share as a store-of-value asset could heat up as the biggest cryptocurrency heads for its best first-quarter performance in eight years, outperforming gold even as inflation expectations rise.
Bitcoin was trading around $58,000 at press time, roughly double where it started 2021. That's the biggest first-quarter gain since 2013, when prices jumped by a whopping 600% in the January-to-March period, per CoinDesk 20 data.
The yellow metal's loss comes even as inflation has become one of the most central topics in traditional markets, with a growing number of Wall Street analysts, investors and economists worried it's the top risk following trillions of dollars of coronavirus-related stimulus from governments and central banks.
According to the data from the Federal Reserve Bank of St. Louis, a key proxy for inflation expectations known as the U.S. five-year breakeven rate has risen sharply from 1.98% to 2.53% in the first three months, extending the ascent from the March 2020 low. The breakeven rate is the difference between yields on inflation-linked notes and those on standard notes with similar maturities.
Some market observers say investors are rotating funds out of gold and into bitcoin.
"BTC just stealing the flows that should be going to gold in this macroclimate," BlockTower Capital founder and Chief Investment Officer Ari Paul said in a Twitter reply to Bloomberg's Joe Weisenthal on Tuesday.
Weisenthal, however, disputed the narrative, associating gold's decline with the rise in real or inflation-adjusted bond yields. The yellow metal has historically moved in the opposite direction to the real yields.
That said, one cannot ignore the growing institutional interest in bitcoin.
According to Arcane Research, bitcoin under management from exchange-traded investment vehicles has grown by 106,000 BTC or approximately 15% since Dec. 30, 2020. These products are now controlling 4.3% of the circulating bitcoin supply.
Further, as of mid-March, four public-listed companies – MicroStrategy, Tesla, Square, and Meitu – owned 40% of bitcoin's annual supply, as noted by Richard Byworth, CEO of Nasdaq-listed cryptocurrency exchange Diginex, in a Bloomberg interview.
The U.S. electric maker Tesla purchased bitcoin in January, becoming the first Fortune 500 Company to adopt the cryptocurrency as a reserve asset. Recently, the company's billionaire CEO Elon Musk announced that the carmaker would begin accepting payments in bitcoin.
The market is already facing a supply-side crisis due to the continued outflow of bitcoins from exchanges amid increased demand from large investors.
According to data provider Glassnode, the number of coins held on exchanges has declined by nearly 5% to 2.4 million in the first quarter and by 600,000 in the past 12 months.
"Bitcoin investment vehicles have thus seen a growth of 450,000 BTC over the last year, contributing significantly to the declining exchange balance," Arcane Research's latest weekly note says.
The odds, therefore, appear stacked in favor of continued price rally in the second quarter – a historically strong period.
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