Bitcoin sell-off likely played a key role in boosting gold’s appeal

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May was a testing time for cryptocurrencies like Bitcoin (BTC). The flagship digital asset was already wobbling after rallying to nearly $65,000 in mid April, owing to profit-taking sentiment among traders.

Elon Musk accelerated the sell-off by reversing his company’s plans to accept Bitcoin as payment for Tesla’s electric cars.

Later in the month, the People’s Bank of China reiterated to the country’s financial institutions against the use of virtual currencies for payments. Chinese authorities are also starting to keep a close eye on crypto mining — the process by which computers mine cryptocurrencies like Bitcoin.

More blows to the cryptocurrency sector came from the U.S. tax and monetary authorities, including Federal Reserve Chairman Jerome Powell, who suggested that more regulations are needed.

All and all, the flurry of negative updates caused the cryptocurrency market to lose more than $500 billion in May. Being the benchmark digital asset, Bitcoin also suffered the brunt of aggressive downside pressure, falling 35.50% in the month.

Bitcoin sell-off likely played a key role in boosting gold's appeal
Bitcoin is undergoing a sharp trend reversal on its monthly charts following May’s crash. Source: BTCUSD on TradingView

Meanwhile, physical gold exchange-traded funds (ETFs) recorded its strongest months in May 2021 since September 2020. The funds across the globe attracted a combined total of $3.4 billion compared to September’s $4.8 billion, according to data provided by the World Gold Council (WGC).

In detail, U.S.-based gold ETFs experienced an inflow worth $2.1 billion. The European gold ETFs reported $1.6 billion worth of deposits. Nonetheless, Asian funds tracking the precious metal’s prices noted an outflow of about $300 million.

Gold ETF flow chart. Source: WGC

Strong demand for gold ETFs also contributed to the rise of its spot prices. As a result, the XAU/USD exchange rate jumped 7.6% in May to $1,912.785 an ounce.

Negative correlation 

The polar opposite moves in Bitcoin and Gold markets indicated that a short-term negative correlation has been brewing between them. In addition, Wall Street veterans Nick Colas and Jessica Rabe also wrote in their DataTrek Research report that the sell-off in virtual currencies might have boosted gold’s appeal among institutional investors.

The market strategists projected Bitcoin as a riskier alternative to Gold. Meanwhile, they noted that the precious metal’s value does not decline by half in five weeks because of Elon Musk tweets, nor does it respond to policymakers’ ban threats.

“Gold is, relative to virtual currencies, a no-drama investment. [Therefore], we continue to recommend a 3-5 percent position in gold for diversified portfolios.”

Bitcoin is largely a speculative bet for wealthy and small retail investors seeking quick profits. But the fixed supply of BTC has also seen it benefit from fears of rising inflation, similar to gold. Corporates including Tesla, Ruffer Investments, Square, and MicroStrategy added Bitcoin to their cash-ruled balance sheets.

They did so to offset inflation risks brought forth by the Federal Reserve’s unprecedented expansionary policies, including near-zero interest rates and a $120 billion monthly asset purchasing program. 

The high-profile investments played a key role in doubling Bitcoin prices in the first quarter of 2021, fueled further higher to around $65,000 by mid-April by an increase in debt-fueled leveraged bets and influx of new retail traders into the market.

On the other hand, Gold ETFs reported six months of back-to-back outflows until May 2021. JPMorgan analysts in January 2021 reported that gold ETFs lost about $7 billion in the same period Grayscale Bitcoin Trust (GBTC), a trust operated by New York-based Grayscale Investments, attracted $3 billion.

The lack of capital injection into precious metal funds also lowered its spot bids; XAU/USD closed the first 2021 quarter down 10.14% opposed to Bitcoin’s 100% returns.

In May 2021, another JPMorgan report suggested that large institutional investors secured their profits in Bitcoin to seek opportunities in gold. They cited open interest data in Bitcoin futures contracts on the Chicago Mercantile Exchange that experienced its biggest drop since October 2020. JPMorgan analysts said:

“The bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors.”

Bitcoin sell-off likely played a key role in boosting gold's appeal
Bitcoin (orange) trended inversely to gold (pink) so far into 2021. Source: TradingView

The statements also appeared as Ruffer Investments, a U.K.-based fund that manages about $33.95 billion for wealthy individuals and charities, also announced Tuesday that it has unloaded its entire Bitcoin position and has netted $1.56 billion in profits.

Duncan MacInnes, investment director at Ruffer, told the Finance Times that they had shifted the funds into gold, commodity stocks, and inflation-protected bonds.

Macinnes added that Bitcoin is still “on the menu” of Ruffer’s potential investments in the future, noting that the world is desperate for new safe-haven against ultra-low bond yields.