Bloomberg's 2021 Bitcoin Outlook: Bitcoin Is Stealing Gold's Thunder

Source: Bloomberg Intelligence

Translation: Moni, Planet Daily

Original Title: "Bloomberg Crypto Outlook" March Report: Is Bitcoin Making Gold "Obsolete"?

Bloomberg Intelligence recently released the March 2021 "Bloomberg Crypto Outlook" report, and Planet Daily has compiled the key points of the report as follows:

Bitcoin vs. Gold, Stocks: No Alternative

Bloomberg Intelligence - We believe that by 2021, Bitcoin will transition from a speculative risk asset to a global digital value store. Bitcoin is the world's first-born cryptocurrency, sparking a global blockchain and monetary digitization revolution. Through stablecoins, the dominance of the U.S. dollar as the global reserve currency has also been strengthened. Many believe that Bitcoin is a complement to the dollar and is replacing the "old" reserve asset - gold. We also believe that Bitcoin is undergoing a price discovery process, and its cautious diversification features will help Bitcoin maintain an upward trend.

The reality is that funds are flowing from gold, bonds, and stocks to Bitcoin. Tesla - the world's largest car manufacturer by market value - has allocated some funds to Bitcoin, which is undoubtedly the most typical example.

Bitcoin Price Consolidation in the $40,000 - $60,000 Range

The Bitcoin price will further consolidate in the $40,000 - $60,000 range and achieve a 60/40 mix migration. In February, the Bitcoin price once approached $60,000, but we found that Bitcoin may find significant buyers around $40,000. Increased demand and decreased supply will lead to a significant price increase in Bitcoin in 2021, expected to add a zero behind $10,000.

Below: A comparison of Tesla's stock price and Bitcoin's price trends - Will 2021 be a potential turning point?

$100,000 may be the next price threshold for Bitcoin. In the price discovery process, Bitcoin is becoming increasingly mature, but we see increasing demand, decreasing supply, and a macroeconomic environment increasingly favorable in the upward trend. A simple analysis suggests that Bitcoin will maintain its pace. After reaching the initial thresholds of over $50,000 and a market cap of $1 trillion in 2021, Bitcoin is ready to stabilize for a while, with $40,000 as the initial retracement support. Based on chart analysis, Bitcoin has once again substantially iterated towards the traditional standard 60/40 investment portfolio: in February, the world's largest car manufacturer by market value, Tesla, has allocated some wealth to the emerging digital reserve asset.

As of March 2, 2021, Bitcoin has risen by about 60%, while Tesla's stock price has remained largely unchanged in 2021. By the end of the year, the gap between the two seems to be leaning towards further expansion.

Reserve Asset Bitcoin vs. Mass Speculation. Bitcoin, as the first-born cryptocurrency, is unique in that its development into a global digital reserve asset is driving a wedge between it and over 8,000 other crypto assets. From the Bloomberg Galaxy Crypto Index (BGCI) trend chart, it can be seen that Bitcoin has outperformed the traditional markets, and with an increasing number of Bitcoin supporters, this index may further appreciate.

Below: Bitcoin remains the primary engine of the cryptocurrency market.

It is anticipated that cryptocurrency regulation may further tighten, especially concerning USD stablecoins. The U.S. Securities and Exchange Commission (SEC) took enforcement action against Ripple Labs (XRP token) in December of last year, indicating the risks faced by certain crypto markets but also reflecting the strengthening of Bitcoin's advantage.  

Bitcoin as a Reserve Asset, Ethereum, and FinTech 

Bitcoin, DeFi, and Excessive Speculation. Analyzing one-year return data, Bitcoin shows more sustained potential. On the other hand, much like the emergence of the internet, we see Ethereum at the forefront of the financial technology, non-fungible token (NFT), decentralized exchange (DEX), and decentralized finance (DeFi) revolution; however, it is unlikely that Ethereum will become a global digital reserve asset in terms of market value. Bitcoin is evolving towards a digital reserve asset "endgame" and is also seen as an alternative investment to stocks and bonds.

Furthermore, funds that previously invested in gold are increasingly tilting towards Bitcoin. However, the number of good cryptocurrencies is still limited, with around 8,500 tradable crypto assets on Coinmarketcap, compared to nearly 5,000 a year ago, indicating that the cryptocurrency market still possesses speculative characteristics.

There is a strong demand for digital dollars in the cryptocurrency wave. The increasing market cap of Tether indicates a need for a digital version of the dollar, signifying that crypto assets are on the rise. The last key turning point for Bitcoin and the cryptocurrency market occurred in April 2019 when the New York Attorney General's office announced an investigation into Tether. After a brief fluctuation, stablecoins regained their strength, maintaining their 1:1 peg with the dollar. Since then, we have been bullish on Bitcoin.

Tether Ensures Bitcoin Becomes Digital Gold Currency

As the world's largest stablecoin, Tether's market capitalization and trading volume have grown by about 10 times. U.S. regulators have suggested embracing digital currencies - especially the U.S. dollar. If Tether undergoes further scrutiny, it will undoubtedly further increase the value of Bitcoin, which is no one's responsibility.

Advanced technology propels Bitcoin vs. commodity competition. Over the past thirty years, most of the time has not been lucrative for commodity investors due to accelerated electrification, decarbonization, and digitization. We believe that the market fundamentals are now bullish on Bitcoin. This "digital gold" is replacing traditional precious metal gold as gold mining increases the demand for fossil fuels.

Chart below: Digital Reserve Assets vs. Rolling Futures.

Although some adverse factors for tech companies are becoming increasingly severe, commodity futures prices are also fluctuating. However, tech companies are likely to continue driving up the S&P 500. Unlike commodities, when the stock market performs poorly, Bitcoin may become a major beneficiary.

The Rising Bitcoin Tide and GBTC

The Grayscale Bitcoin Trust GBTC appears to be selling at a discount, indicating that the Bitcoin price in March is likely to reach $100,000. Referring to historical data, it is found that the Grayscale Bitcoin Trust had a high discount in February, providing a solid price foundation for the Bitcoin market. On the other hand, in December 2020, the CME Bitcoin futures trading price rose by about 20%.

According to Bloomberg Intelligence analysis, the Grayscale Bitcoin Trust closed at a 2.7% discount in February. The most recent example here was seen in March 2017 when the Bitcoin price was about $1,000 but surged to nearly $20,000 in December 2017. Currently, the Bitcoin held by the Grayscale Bitcoin Trust accounts for 4% of the total Bitcoin market value, whereas this percentage was only 1% in 2017, making the Grayscale Bitcoin Trust's discount effect more significant in the market now.

Grayscale Bitcoin Trust Panic Selling and Bitcoin Bottoming Out

A sharp drop in the Grayscale Bitcoin Trust premium usually signals Bitcoin bottoming out. With the introduction of Bitcoin exchange-traded funds in Canada, the likelihood of the U.S. opening Bitcoin ETFs is increasing, adding pressure on the trust's price, but Bloomberg Intelligence believes that maintaining an upward trend is the more likely outcome.

Arbitrageur's Delight — Bitcoin GBTC vs. Futures. By the end of February, the extreme price difference between the Grayscale Bitcoin Trust and the futures traded on the Chicago Mercantile Exchange in December 2020 was around 20%. We believe this is a positive development for Bitcoin. The chart below depicts the situation where the Grayscale Bitcoin Trust is at its largest discount ever compared to rolling futures and the Bitcoin spot price. Buying GBTC at such a discount implies that the actual Bitcoin price should be around $43,000, while the December 2020 CME futures settlement price was $53,250. Fees and slippage would offset the actual 20% gap, but for long-term Bitcoin investors, it appears one could simply hedge part of their futures position and lock in profits.

Chart: Grayscale Bitcoin Trust Discount vs. Futures Premium.

Normal maturation and expanding market depth will narrow the widespread price disparities, and we believe the extreme situation at the end of February 2021 indicates that Bitcoin is still in an upward trajectory.

Bitcoin is Replacing Gold

Bitcoin is replacing gold — perhaps it's only a matter of time. For investors, the speed at which Bitcoin is replacing gold in their portfolios is accelerating. In 2020, Bitcoin's volatility continued to decline while most other asset volatilities increased. Bitcoin has gained "legitimacy," and as we move into 2021, we see nothing stopping Bitcoin from replacing the "old-fashioned" gold.

Chart: For those without allocated Bitcoin assets, is the risk greater?

In the long term, the risks for both Bitcoin and gold are low. Funds are flowing out of gold and into Bitcoin at an increasing rate, and we see no sufficient reason to reverse this trend. Bitcoin is becoming a global reserve asset, with its price-to-gold ratio already surpassing 10x and heading towards 100x.

Irrespective of price, we believe the upward trend in Bitcoin adoption is prudent, especially for historical gold allocators. In a rapidly digitizing world, gold seems to be becoming redundant, and this risk is magnifying.

Gold, Bitcoin Advantage: Lower relative volatility. Bitcoin continues to outperform gold and has lower risk compared to the S&P 500 index. Bloomberg Intelligence analysis shows that the 260-day volatility of the Gold-Bitcoin 75/25 Index has reached its lowest level, being 20% lower than the same risk measure for the S&P 500 index, a situation similar to early 2016. From the start of 2008 to the end of 2011, the Gold-Bitcoin 75/25 Index increased by 7x, while the S&P 500 index only grew by 1x.

Chart Below: Gold-Bitcoin Index Less Volatile Than S&P 500.

Typically, Bitcoin has a negative 260-day correlation with the stock market, but it reached 0.34 in early March, the highest value to date. With the Fed launching quantitative easing to drive GDP higher, the Gold-Bitcoin Index price is expected to receive more sustained support.

Bitcoin Volatility on the Decline

Bloomberg Intelligence believes that once Bitcoin stabilizes at a new threshold with greater market depth (potentially near $100,000), volatility will decrease. 

Amazon.com   and Bitcoin — Internet siblings. Bloomberg Intelligence suggests that if the traditional valuation model persists, Bitcoin's annual volatility will outperform Amazon.com's stock price within a few years. According to analysis, Bitcoin's 260-day risk metric is around 60%, while the same metric for the world's major internet commodity seller is 40%. By 2022, Bitcoin's volatility regression line is expected to surpass that of Amazon.com   company. It is worth noting that in its initial trading years, Amazon.com   company's volatility averaged over 100%.

Chart Below: Bitcoin Volatility Set to Outperform Amazon Stock Price.

The Bitcoin mining schedule is fixed, unlike most assets and markets with uncertain supply and demand. Bitcoin is an internet-based innovative technology with the potential to become a global digital store of value, maintaining its upward trend in market capitalization and possibly surpassing Amazon's market cap.

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