Do Traditional Investors See Bitcoin as Risk Asset?

Bitcoin and Gold

Eric Balchunas, a senior ETF analyst, has recently compared Bitcoin to “gold as a teenager.” The relation between two assets can shed some light on how Wall Street sees crypto assets in the current situation.

The surge in demand for Bitcoin has coincided with significant selling of gold ETFs, which experienced outflows of $7.7 billion over the same period, even as the price of gold reached an all-time high of $2,200 per troy ounce.

The data indicates that outflows from gold ETFs began in April 2022 and have continued consistently since then, without acceleration triggered by the launch of U.S. spot Bitcoin ETFs. Approximately $46 billion has been withdrawn from gold ETFs over this period.

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This divergence in ETF flows challenges the notion that Bitcoin's rise has directly led to gold's decline in investor interest, as the trends in gold ETF outflows began before the significant rise of Bitcoin ETFs in the U.S.

How VC firms invest in crypto

According to Galaxy report, in the first quarter of 2024, venture capitalists injected $2.49 billion into crypto and blockchain-focused companies through 603 deals, marking a 29% increase quarter-over-quarter in funding amount and a 68% increase in the number of deals.

Traditionally, venture capital investment in the crypto sector has closely mirrored the movements of Bitcoin's price. However, over the past year, this correlation has broken down. Despite Bitcoin's significant price rise since January 2023, VC activity has not seen a proportional surge.

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Although Q1, 2024 witnessed a notable increase in Bitcoin's value, the level of capital invested still remains below the heights seen when Bitcoin last surpassed $60,000.

This divergence can be attributed to a combination of industry-specific catalysts (such as Bitcoin ETFs, advancements in areas like restaking and modularity, and Bitcoin Layer 2 solutions) and broader macroeconomic factors like interest rates.

BTC as risk-off asset

Bitcoin is often seen as a high-risk investment due to its rapid growth and price volatility. However, according to Ark-Invest, the Bitcoin network actually embodies characteristics of risk-off assets, promoting financial sovereignty, reducing counterparty risk and enhancing transparency.

As the first digital, independent, global, rules-based monetary system, Bitcoin's decentralization mitigates systemic risks associated with traditional financial systems relying on centralized intermediaries. It serves as a platform for transferring and storing Bitcoin, a scarce digital monetary asset.

Unlike traditional financial systems, which rely on centralized institutions, Bitcoin operates as a single institution governed by a global network of peers, promoting automated, public and transparent enforcement of rules.

Bitcoin's volatility is paradoxically tied to its monetary policy, underscoring its credibility as an independent monetary system. Unlike modern central banking, Bitcoin does not prioritize price stability; instead, it controls Bitcoin's supply growth to prioritize the free flow of capital. This dynamic explains Bitcoin's price volatility, which is driven by demand relative to its supply.

Comparing Bitcoin's price with the Fed Funds Rate demonstrates its resilience across different interest rate and economic environments. Notably, Bitcoin's price has appreciated significantly in both high and low interest rate regimes.

Over the past decade, Bitcoin has proven resilient during risk-off periods, with its price consistently higher than during such events.