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Bitcoin plunged to its lowest level since February on Wednesday, hitting a low of $36,219, down 44% from an all-time high of $64,829 it reached just last month.
All of the gains accrued since
Tesla
(ticker: TSLA) got involved with the cryptocurrency have now been erased. And as with many things in crypto, it’s not entirely clear why.
The market has been dropping since Elon Musk began questioning Bitcoin’s negative environmental impacts about a week ago. One more recent catalyst may have been China’s decision to reiterate its ban on financial institutions facilitating crypto transactions. In the crypto market, momentum can turn quickly and selloffs can accelerate as people try to lock in gains made in the latest bull market. Anyone who bought cryptocurrencies in 2020 is still showing a large paper profit, but may be getting anxious that those gains won’t hold for long.
There’s new data showing that institutional holders have been reducing their holding of Bitcoin futures and funds in the past few weeks, and potentially reallocating that money to gold.
Some investors consider Bitcoin a gold-like asset, a store of value that will hold up during times of inflation and money-printing by central banks. That argument has convinced some large hedge-fund managers like
Stanley Druckenmiller
to buy in, and it helped lift the price to over $60,000 last month. While Druckenmiller and others say that Bitcoin can’t fully replace gold, some analysts have found that it has been stealing gold’s thunder.
But the tide may be turning, at least in the short term. Investors have been pulling money out of Bitcoin futures and funds and putting more of it into gold, according to a new analysis by J.P. Morgan strategist
Nikolaos Panigirtzoglou.
That’s a shift from the prior two quarters, he wrote.
“The Bitcoin flow picture continues to deteriorate and is pointing to continued retrenchment by institutional investors,” he wrote.
The four-week flow of institutional money into Bitcoin funds went negative for the first time at the end of April, just after Bitcoin hit its new highs around $64,000. It’s not immediately clear why institutions are starting to pull money out, but clearly there has been a run for the exits in the past month.
“Perhaps institutional investors are fleeing Bitcoin as they see its previous two-quarter uptrend ending and thus seek the stability of traditional gold away from the rapid downshifting of digital gold,” Panigirtzoglou wrote. “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.”
It’s not just institutions. Panigirtzoglou also estimates that retail interest has declined, too, with an expected decrease in purchases of Bitcoin by Square (SQ), the payments company that now lets users buy and sell Bitcoin.
Panigirtzoglou uses a unique method for valuing Bitcoin — what he calls a “volatility ratio.” Based on that ratio, he estimates that Bitcoin’s fair value is $35,000. If Bitcoin became as popular as gold in investor portfolios, it could rise as high as $140,000. But he doesn’t expect that anytime soon.
“This $140k price should be thought of as a long-term theoretical target assuming a convergence of Bitcoin volatility to that of gold and an equalization of Bitcoin allocations to that of gold in investor portfolios,” he wrote. “Needless to say such convergence or equalization of volatilities or allocations is unlikely in the near future.”
Write to avi.salzman@barrons.com