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Big investors are switching out of bitcoin and into traditional gold as inflation fears heat up, JPMorgan says

Institutional investors are switching out of bitcoin and are instead returning to gold, for the first time in six months, JPMorgan research analysts said in a note on Tuesday. 

A combination of rising inflation, tightening regulation and ripples running through the online crypto community after Elon Musk announced that Tesla would no longer be accepting bitcoin as a form of payment for environmental reasons have caused bitcoin’s price to tumble in recent weeks. 

Since hitting a record high of almost $65,000 in mid-April the asset has lost around half its value to last trade around $35,470 on Wednesday.

“The bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors. Over the past month, bitcoin futures markets experienced their steepest and more sustained liquidation since the bitcoin ascent started last October,” JPMorgan said. 

Momentum traders including crypto funds that have unwound assets recently are partially responsible for this, according to the research note. A key momentum indicator has therefore turned negative from a short term perspective, which could lead to more traders selling off their assets. 

In the longer term however, the momentum indicator is still positive. “It is perhaps too early to characterize bitcoin as oversold,” JPMorgan said, adding that bitcoin futures and related products had also been affected by the drop in value of the digital asset.

“What is striking is that the recent outflows from bitcoin funds have been accompanied by inflows into gold ETFs in a reversal of the last quarter of 2020 and the beginning of this year,” the research note said, adding that a similar pattern can be observed with futures contracts on the two assets. 

Large parts of the crypto community have hailed bitcoin as the new gold, especially young investors who see it as a more worthwhile investment compared to bullion, which has earned bitcoin the nickname “millennial gold”. 

The ongoing shift is mostly driven by institutional investors, JPMorgan said. From an institutional perspective, flows into bitcoin began to slow down during the first three months of this year and turned negative at the beginning of the second quarter. In comparison, retail flows have stayed relatively stable throughout. 

The reasons behind the shift are however unclear, although JPMorgan said bitcoin’s volatility, especially the speed at which it tends to fall, was at odds with gold’s greater price stability. 

“Or they perhaps view the current bitcoin price as too high relative to gold and thus do the opposite of what they did in the previous two quarters, i.e. they sell bitcoin and buy gold,” the bank said.

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