The financial world is buzzing over the remarkable surge in the prices of gold and Bitcoin since late 2023, a trend that has accelerated sharply in the early months of 2024.
Gold, the traditional inflation hedge and crisis haven, hit a record high of $2,265 per ounce in the US, and Rs 6,896 per gram in India. Bitcoin, the upstart digital currency, has also hit a life high, crossing the $71,000 mark briefly during trading on Monday.
While gold and Bitcoin are very different assets, many of the reasons used to justify their rise are the same. Primarily, they revolve around the eroding trust in traditional monetary systems, rising economic uncertainty, and the flood of liquidity unleashed by central banks.
However, Bitcoin's latest surge has an additional driver - the launch of Bitcoin ETFs in the US, which are luring a whole new class of institutional investors into the cryptocurrency market. Let us first look at this bitcoin specific reason, as it is the simplest to explain.
A New Class Of Buyers
The key event that has supercharged Bitcoin's rally over the last two months was the approval given by the US financial regulator to exchange traded funds that derive their value from that of bitcoin's spot prices, starting in January.
These exchange traded derivatives provide a regulated and accessible avenue for institutional investors to gain exposure to Bitcoin without having to navigate the complexities of buying and holding the actual cryptocurrency.
The impact was immediate and dramatic. As Nathan McCauley, CEO of Anchorage Digital, observed in a Reuters' report: "Traditional institutions were once sitting out; today, they are here in full force as the principal drivers of the crypto bull market." In February alone, leading tech firms like MicroStrategy and Reddit disclosed major Bitcoin purchases.
The numbers tell the story. Since the Bitcoin ETFs began trading, they have collectively attracted over $15 billion in inflows. That kind of buying pressure is unprecedented in Bitcoin's short history and a major reason why its price has nearly doubled this year.
The ETFs are not just bringing in more money, but also a different kind of money.
By providing a familiar and regulated vehicle, they are attracting large, long-term focused institutional investors who were previously wary of Bitcoin's unregulated nature. Asset managers, pension funds, endowments - the so-called "smart money" - are now flooding into the market.
This institutionalization of Bitcoin is a game-changer, and some believe that these deep-pocketed investors are less sensitive to price and volatility.
Besides, these investors are seen as increasing the 'respectability' of cryptocurrencies. After years of dismissing Bitcoin as a fringe speculation or even outright fraud, the approval of ETFs is seen as the financial establishment now embracing it as a legitimate asset class.
The symbolic turning point came when BlackRock, the world's largest asset manager, launched its own Bitcoin ETF. For a firm that once called Bitcoin an "index of money laundering," this was a dramatic about-face. In fact, the BlackRock Bitcoin ETF is the largest of its kind, and its bitcoin holdings are now worth $17.7 bln.
Other Wall Street giants like Fidelity and WisdomTree also have their own ETFs.
This stamp of approval from the financial elite has given Bitcoin a new aura of respectability and credibility. No longer just a shadowy Internet token favored by hackers and drug dealers, Bitcoin is now being discussed as a serious hedge against inflation, a portfolio diversifier, and a potential challenger to gold's status as the ultimate safe haven asset.
Of course, Bitcoin's newfound institutional popularity does not erase its many risks and flaws. The cryptocurrency remains highly volatile, energy-intensive, and vulnerable to regulatory crackdowns. Its use case as an actual currency remains limited. There are valid concerns that the ETF-fueled rally is blowing up another speculative bubble.
Nevertheless, the influx of smart money via ETFs is transforming Bitcoin from a retail-driven fad into an increasingly institutionalized asset class. By providing a safer and more accessible on-ramp, ETFs are expanding the pool of potential Bitcoin buyers and broadening its investor base. This evolution could mark a major turning point in Bitcoin's maturation from a niche experiment to a mainstream financial instrument.
The Bigger Picture
While the launch of Bitcoin ETFs is a proximate driver of the current rally, there is also a longer-term motivation -- one that played a key part in the creation of cryptocurrency itself.
That has to do with the eroding faith in traditional monetary systems -- a factor that has traditionally driven people towards gold.
The growing anxiety over the state of the global financial order and the role of the US dollar in particular has been leading to risk-averse investors hedging their bets using gold.
But, like with ETFs in case of Bitcoin, there was a clear trigger for gold prices to move up recently -- central bank buying.
After Russia attacked Ukraine, the US government imposed strict sanctions on Russia. This brought home to many central banks the importance of holding their assets in non-dollar assets, including gold. Starting in 2022, many central banks -- particularly those of Russia and China -- have been liquidating their dollar assets and stocking up on gold.
If US financial sanctions prompted rival countries such as China and Russia to buy gold, the profligate policies of the US government since 2020 have given pause for thought to more friendly regimes, including the Indian Reserve Bank.
The dollar's status as the world's reserve currency has traditionally allowed the US to run massive deficits by borrowing in its own currency. But it has also sowed the seeds of the dollar's potential downfall by eroding trust and discipline. With the US debt exploding by $1 trillion every 100 days, the risk of a dollar crisis is rising.
As a result, global central banks are now loading up on gold like never before.
A staggering 39 tons were added to official gold holdings in January 2024 alone, the 8th straight month of increased buying. This reflects a loss of confidence in the very fiat currencies that central banks issue and manage.
The major buyers of gold in January included the Central Bank of Turkey (12 tonne), People’s Bank of China (10 tonne), Reserve Bank of India (9 tonne) and National Bank of Kazakhstan (6 tonne).
Another development that has has a major impact on gold demand has been the meltdowns seen in China's real estate and stock markets. Individual investors in China -- including younger ones -- have shifted a substantial portion of their savings to gold, increasing the demand further in the world's largest gold market.
Economic Anxiety
Finally, there is also the troubled economic backdrop. Despite the unprecedented fiscal and monetary stimulus of recent years, growth remains anemic in much of the developed world. Europe is flirting with recession, Japan is stagnant, and even mighty China is grappling with deflation.
In this low-growth environment, investors are gravitating to assets that can preserve purchasing power and provide diversification. Gold's time-honored role as a crisis hedge is in high demand. While Bitcoin too could be seen as a hedge, its increased volatility continues to keep many smaller investors away -- particularly those who lost money in the last boom-and-bust cycle.
Ultimately, the synchronized surge in gold and Bitcoin reflects a profound shift in attitudes toward money itself. Bitcoin's rise from cypherpunk obscurity to institutional darling is particularly remarkable. Just a few years ago, the idea of regulated Bitcoin investment products would have been unthinkable.
The launch of Bitcoin ETFs represents more than just a new investment fad. By embracing Bitcoin, even in a limited way, the financial establishment is acknowledging the need for alternative stores of value in an era of depreciating fiat currencies. Bitcoin ETFs have given the cryptocurrency a new veneer of legitimacy and staying power.
Will this institutionalization of Bitcoin be the catalyst that finally establishes it as a mature asset class, or are we witnessing another speculative mania? Only time will tell. What is clear is that as faith in the US dollar erodes, gold and cryptocurrency investors are reaping the rewards.