Goldman Sachs analysts say they doubt that Bitcoin is taking material investment flows away from the gold market, citing regulatory hurdles for professional investors in Bitcoin and the absence of outflows from gold exchange-traded funds (ETFs).
Further, Goldman said, the demand for Bitcoin appears to be mostly speculative, with total market capitalization still a small percentage of that for the gold market.
Bitcoin has captured the attention of market participants due to the cryptocurrency’s meteoric price rise this year and the launch of Cboe Options Exchange’s Bitcoin futures contract; CME Group is poised to launch a contract as well. That has left many commodity investors wondering whether Bitcoin is taking demand away from gold, Goldman said.
“We believe the answer is no,” said the investment bank in a report released Monday.
For starters, analysts cited “vastly different” pools of investors. Those who use gold exchange-traded funds or commodity indices are automatically covered by anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, which Goldman says are already “baked in” to processes in these markets. There also has been increased regulatory scrutiny for physical trading in jewelry, bars and coins in recent decades, Goldman pointed out.
“In contrast, there is still very little clarity on how trading in cryptocurrencies could be made to comply with AML and CTF regulations, even in theory,” Goldman said. “This creates huge regulatory hurdles for professional investors wishing to enter these markets.”
Also, said Goldman, there has been no “discernible” outflow of gold from ETFs. In fact, gold holdings in ETF shares recently hit their highest level since 2013 and are up 12% for the year to date.
Goldman also cited what analysts see as different market characteristics of gold and Bitcoin.
“While Bitcoin has a mathematically certain total supply, and gold has a finite (but less certain) supply in the earth’s crust, even a cursory examination shows very different market dynamics,” Goldman said. “We believe the composition of demand between Bitcoin and gold is the key difference in the recent price action. In our view Bitcoin is attracting more speculative inflows relative to gold. The net effect is that Bitcoin has demonstrated much higher volatility and lower liquidity/price discovery compared to gold.”
The market cap of Bitcoin was estimated at $275 billion, and all of the crypotocurrencies combined have a market cap of less than $500 billion, Goldman said. This is well below $8.3 trillion for gold.
“While the lack of liquidity and increased volatility may keep Bitcoin interesting, it is unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history,” Goldman said.
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