BITO ETF: Comparing Bitcoin to Gold as a Safe Haven

In my recent thesis on the Valkyrie Bitcoin Strategy ETF (BTF), I showed how Bitcoin has been challenging gold in times of uncertainty. With this, by covering the ProShares Bitcoin Strategy ETF (New York: Beto) any He also invests in Bitcoin futures, and I go so far as to assess whether it would be better to own a crypto asset than the yellow metal in the event of sudden market conditions like we saw during the banking turmoil.

To set the tone, the chart below shows how the cryptocurrency ETF has been closely tracking the SPDR Gold Shares ETF (GLD) since the beginning of March which coincided with problems affecting US regional banks.

Interestingly, the graph shows that while GLD outperformed, it was only by a paltry 0.04%, which makes us wonder if bitcoin, which is sometimes referred to as digital gold. Which we should hold as a safe asset given that BITO is also income friendly.

Thus, I start with the advantages of owning crypto assets.

Evaluating Bitcoin’s role as a digital safe haven

Returning to the banking problems, one of the reasons was the loss of value of US Treasury bonds as a result of the rise in yields due to the Federal Reserve raising interest rates at a rapid pace. Now, regional banks are a safe haven in times of turmoil, holding so much government bonds as part of their overall assets that, ironically, when they needed them most, they had to sell them for less than they were to begin with. Buyer. This is one of the risks associated with rising interest rates that few expected.

At the same time, gold which has traditionally played the safe-haven role failed to provide as meaningful (or equivalent) upside as was expected. On the contrary, in the early stages of the crisis, BITO rallied more than 20% as shown in the blue chart below while GLD barely managed 9%.

Another factor that may have helped digital assets establish themselves in the aftermath of the great financial crisis of 2008 can be had to do with the vulnerability of our financial system revolving around money printing by central banks that devalue fiat currencies. Thus, Bitcoin was created as a solution that aims to “fix” the traditional banking system by forming an alternative. In the same vein, the discussions about raising the debt ceiling suddenly shed light on the high debt-to-GDP ratio in the country once again providing support for Bitcoin.

Continuing further, compared to physical gold, Bitcoin has some advantages as it is easily convertible, making it easier to transfer as was seen when Ukrainian refugees had to leave their country in a hurry after it was invaded in February last year. At the time, being easily divisible and convertible into dollars or euros, it enabled transactions such as buying food or paying for housing. This also points to ease of storage and administration, especially when one takes the time to think about the inconveniences if these refugees had to carry around gold coins and exchange them for consumer goods. Therefore, Bitcoin has established itself as a medium of exchange, just like the dollar bills we carry in our wallets.

Another appeal of Bitcoin is that it cannot be subject to manipulation or control by any government or central bank, unlike US dollars, which can be printed at will by the Treasury Department, the total amount of Bitcoin is limited to just 21 million.

This, in turn, should give it a deflationary nature.

Bitcoin limits

However, this was not the case, and the reason is that the dark blue BITO chart failed to produce any upward trend when the US inflation rate started to rise rapidly in 2022 as shown in the pale blue. Instead, orange GLD performed well, again not delivering a parabolic rally as some had expected, but nonetheless an honorable performer for those who held on to this traditional safe haven.

Looking deeper, the BITO chart more closely lines up with the Invesco QQQ ETF (QQQ) depicted by the green chart above, at least in 2022. This shows that after all, as a digital asset built with blockchain software, Bitcoin remains tied to technology. So, in the same way as technology, Bitcoin also presents some risks as an investment.

First, it is vulnerable to cyber attacks and technical issues, and second, regulations may limit its adoption and growth.

Speaking regulations, there was already a lot of it in the wake of the collapse of cryptocurrency exchange FTX and the arrest of Sam Bankman-Fried who headed it. That was a dark period in the history of Bitcoin and it saw a huge amount of outflows from related funds with the value of the cryptocurrency dropping from $21k to $16k or roughly 20% according to my calculations in a matter of days. Volatility has also been reflected in the ProShares ETF as shown below, due to the fact that it holds Bitcoin futures contracts directly and not other assets such as mining stocks.

This was not the end of crypto problems. After FTX was taken offline, other companies such as Genesis, Luna, Celsius, and Voyager went bankrupt. For cryptocurrency lender Genesis, its demise was largely triggered by FTX, which after it went under, denied it could withdraw cryptocurrency in its custody. This is somewhat similar to the systemic risks arising from lack of liquidity in the financial sector and shows that even if cryptocurrency markets are open 24 hours a day, access to reliable and secure trading platforms can be limited, especially for inexperienced investors.

Rationale for BITO Income

On the other hand, as a CME Bitcoin futures holder, BITO is regulated by the CFTC or Commodity Futures Trading Commission. This means that with careful regulatory oversight in the same way as other commodities such as oil or corn, it does not incur the same level of liquidity risk that would affect the defunct cryptocurrency exchanges that I mentioned earlier. In fact, you can trade it through any brokerage account to get around the need for a wallet or crypto account as explained below.

Going back to the comparison with gold, when it comes to liquidity, the precious metal is easier to buy and sell than bitcoin. However, unlike BITO, GLD does not pay any dividends as shown in the chart below. So, with a logical income basis, BITO might be the kind of Bitcoin exposure you might be looking for. Moreover, from a liquidity point of view, it also has higher assets under management compared to BTF which means that it trades more on a daily basis. In fact, it has an average trading volume of $165.18 million compared to just $4.89 million for the Valkyrie ETF.

To further justify investing in the ProShares ETF, note that generally bearish inflation is favorable for Bitcoin as we saw previously, but, on a note of caution, as evidenced by the relevant price action, you need a high degree of risk tolerance for stomach volatility. In this regard, regulators are still scrutinizing the industry which could also create more downside risks.

Choosing Bitcoin as a converter besides gold

However, as we’ve seen during the banking turmoil, bitcoin also comes with rewards, and for that matter, with higher interest rates continuing to make its way through the financial system, we still haven’t completely out of the way when it comes to the stability of the banking system, which means that there are still Need to exercise caution. This can be done by either staying cash or choosing safe haven.

For this purpose, the choice between gold and bitcoin will depend on individual preferences, and those who prefer the stability of a century-old store of value may opt for gold. Others with higher risk profiles may choose to return Bitcoin. In this case, the monthly distributions of BITO as described above can provide some protection against volatility. Moreover, since Bitcoin as a digital asset is still relatively new, it also makes sense for it to be a diversification tool in your precious metals portfolio.

Finally, as an asset class associated with both gold and technology, Bitcoin should be valued accordingly. Moreover, BITO pays out regular dividends that somewhat reduce the risk of capital decline. As for its value, it is holding around $15, which is now the support level after dropping to the $9.5-$10 level during the FTX crisis. Momentum indicators are not pointing to a move in either direction right now, but a Fed skip, or a pause in rate hikes could act as a catalyst to the upside as this should somewhat ease monetary conditions which is beneficial for all risk assets in general. general. The ETF could rally to the $18 resistance which would form a $2.7 (18-15.3) upside or a 17.5% gain based on the current share price of $15.3. However, any economic indicators that show inflation getting more stable or a cryptocurrency exchange being hacked are synonymous with bitcoin volatility.