JP Morgan’s argument that Bitcoin “has overtaken” gold doesn’t hold up

On March 10, a friend forwarded me an article on Sina titled “JPMorgan Chase: Bitcoin ‘has surpassed’ gold.” The article mentioned the gold figure of 3.3 trillion, similar to my article “What is the reason for Bitcoin’s rise to $3.3 trillion?” (chainless.hk) The data is so coincidental that it aroused my interest. The article is difficult for ordinary people to understand, but their purpose of shorting Bitcoin has been achieved.

What does the U.S. financial community think of Bitcoin?

There have always been two factions in the U.S. financial community: those who are bearish on Bitcoin and those who are bullish on Bitcoin. Currently, those who are bullish are BlackRock, the world’s largest asset management company, and Fidelity, the fourth largest. Goldman Sachs, among others, has also joined the bullish camp. Those who are bearish include State Street, the world’s second-largest asset management company, Vanguard, the third-largest asset management company, and J.P. Morgan. So, it’s no surprise that the bearish report comes from JPMorgan Chase.

This time, the U.S. vote to approve a Bitcoin spot ETF was 3 to 2. In fact, the SEC Chairman’s position is a little more bullish than neutral, and the forces of bearishness and bullishness are roughly equal. It also reflects evenly matched capital strength.

Bitcoin does not apply to stock valuation. It is a demand valuation, which is much simpler than stock valuation and depends entirely on the balance of funds. For this, please refer to “How to Valuate Bitcoin” (chainless.hk).

In short, if the bearish power is strong, it will fall; if the bullish power is strong, it will rise. When the market is unanimously bearish, it will increase. The market will reverse or consolidate because it no longer has the power to be bearish. Similarly, when the market is unanimously bullish, it will fall. It is the iron law of the stock market.

So, will Bitcoin rise or fall? Obviously, it is not “unanimously bullish” now, but more and more people are bullish, so the big trend is upward. Gold is different from Bitcoin. Unlike Bitcoin, some people say it is worthless, while others say it equals global wealth. After gold has accumulated a long-term consensus, there is not much difference between the long and short forces in the market, and there is not much pressure to rise or fall. The triggers for the rise in gold prices are rising inflation and geopolitics. The two are consistent in combating inflation. However, in terms of functional attributes, Bitcoin is better than gold. If Bitcoin’s functional attributes cannot be realized, it will only be a store of value used to fight inflation. At most, it will be the second best, with a market value of 3.3 trillion U.S. dollars. However, Bitcoin has not yet reached its target as a store of value, and there is room for growth of about 2 trillion. And Bitcoin has just entered the mass market from a niche market. How high will it go? If the conditions of Hal Finney’s conjecture are met, the price is 10 million U.S. dollars. To learn more about Hal Finney’s conjecture, please read my article “Behind the Scenes of the U.S. Securities and Exchange Commission’s Approval of Bitcoin ETF” (chainless.hk).

I am firmly bullish. The reason is straightforward. More and more people are bullish.

A team of analysts led by JPMorgan Chase’s Nikolaos Panigirtzoglou confused Bitcoin and Gold at different product stages. One is in the growth stage, and the other is in the maturity stage. Volatility will be used for mature products, which are used to compare Gold and Bitcoin. It leads to the conclusion that Bitcoin prices are now overvalued, which history will prove absurd.

The following is quoted from Odaily’s compilation of previous reports by Nicholas’s JP Morgan analyst team. Its recent forecasts and opinions are as follows:

Report on February 29: The halving event in April may trigger a sharp drop in the price of Bitcoin, which is expected to drop to 42,000 USDT;

(Note: It has not been confirmed yet; it must be wrong)

February 22 report: Retail investor enthusiasm for cryptocurrencies rebounded in February and may have contributed to the strong gains in the cryptocurrency market this month. The main lines are A.I. and Meme.

(Note: Wrong. The main line is Bitcoin)

Report on January 25: GBTC profit-taking is basically over, and Bitcoin’s room for decline is limited. (Note: BTC’s closing price that day was 39961 USDT)

(Note: Wrong. It is not the decline that is the starting point of the rise)

Report on January 18: As GBTC takes profits, the price of Bitcoin may face more significant pressure; (Note: BTC’s closing price that day was 41327 USDT)

(Note: Wrong. As of January 25, the total dropped by 1,363 USDT in 7 days, a decrease of 3.3%)

Report on January 12: The possibility of Ethereum spot ETF being approved before May does not exceed 50%;

(Note: cannot comment)

Report on January 11: Bitcoin spot ETF is expected to have an inflow of US$36 billion in 2024, and GBTC is expected to have an outflow of US$13 billion.

(Note: Wrong. Bitcoin spot ETF inflows were 40 billion in two months)

The probability of prediction accuracy being less than 50% is not even at the level of a monkey.

JPMorgan Chase is also a big name in the industry, but no matter how good an expert is, he will make a big joke if he uses his existing knowledge to analyze something he doesn’t understand. Perhaps it is to cater to the leadership’s intention and blindly cater to the views of Jamie Dimon, chairman of JPMorgan Chase, giving up in-depth research. We must know that the leader is always right. When Damon repentes one day, Nicholas will be the scapegoat.

Bitcoin vs Gold

The following analysis is quite brain-burning, so readers who are not for research purposes should read it here.

I couldn’t find the original text of Nicholas’ analysis report. I saw his post on LinkedIn. The content and views were the same. I posted the full text:

“How much of a role could bitcoin play within investors’ portfolios and in particular within the universe of Registered Investment Advisors? The most similar asset to compare is gold given the perception of bitcoin as digital version of gold.

“Within the broad universe of traditional and alternative asset class of around $235tr (excluding the assets held by banks and F.X. reserve managers), the amount of gold held for investment purposes is around $3.3tr, implying an allocation to gold of around 1.4%. Of this $3.3tr only 7% or $230bn is held in fund format (mostly via physical gold ETFs). The rest is held in the form of bars and coins.

“One could argue that if bitcoin matches gold in investors’ portfolios its market cap should rise to $3.3tr from $1.3tr currently implying more than doubling in price. However this calculation misses an important factor which is risk. Most investors take risk and Volatility into account when they allocate across asset classes and given the Volatility of bitcoin is around 3.7 times the volatility of gold it would be unrealistic to expect bitcoin to match gold within investors’ portfolios in notional amounts. If instead one assumes bitcoin matches gold in risk capital terms, the implied allocation falls to $3.3tr/3.7=$0.9tr. This implies a bitcoin price of $45k, significantly lower from current levels. In other words, with the bitcoin price at $68k currently, the implied allocation to bitcoin within investors’ portfolios has already surpassed that of Gold in Volatility adjusted terms.

“How much of bitcoin would be eventually held in ETF format? Again if one looks at gold as a guide, around $230bn of gold held for investment purposes is in ETF format as mentioned above. Applying the same vol ratio of 3.7, implies a bitcoin ETF size of around $230bn/3.7=$62bn. In our opinion this is a realistic target of the potential size of spot bitcoin ETFs over time perhaps within a period of two to three years, though much of the implied net inflow could represent a continued rotational shift from existing instruments and venues to ETFs.”

I am not a gold expert. I don’t know the source of some essential data. For example, it is usually said that the market value of gold is 13.7 trillion. Where does this data come from? I can’t find it. I found the following chart:

The investment part in the figure is 30%, which is close to Nicholas’s “gold holdings for investment purposes are approximately US$3.3 trillion.” Based on Nicholas’s 3.3 trillion, the total market value of gold is 11 trillion. The current popular saying is 13.7 trillion. In addition, according to folk reports, since the discovery of gold, the total amount of gold mined and existing in the world is currently about 180,000 tons. Based on the current gold price of about 2,100 US dollars per ounce, the total value is about 12 trillion, equivalent to the above value.

His figures can be recognized.

My article is based on market rules, and I believe that the second-largest stored value of Bitcoin is equivalent to 30% of the market share of the largest gold, thus reaching the conclusion of 3.3 trillion. See my article “What is the reason for Bitcoin to rise to 3.3 trillion?” (chainless.hk).

Nicholas’ proposition is: Assuming that the market values of Gold and Bitcoin in the investment portfolio are equal, how should Bitcoin be allocated?

Among the 3.3 trillion gold investments, funds only account for 7%, US$230 billion. The market value of Bitcoin is 3.3 trillion, and funds account for 7%, isn’t it also 230 billion U.S. dollars? But, Nicholas added: “The volatility of Bitcoin is about 3.7 times the volatility of gold.” Volatility is usually a short-term indicator, and it is not easy to find an annualized volatility. The chart below covers the entire year of 2016, comparing the Volatility of Bitcoin and Gold. The 3.7 times data is not outrageous, and I recognized it.

The total market value of Bitcoin is 3.3 trillion, divided by the Volatility of 3.7, which is 0.9 trillion. Based on 20 million Bitcoins, the price of each Bitcoin is 45,000. According to his logic of equal allocation of Bitcoin and Gold, the current price of 68,000 is overvalued. That’s why his report on February 29: The halving event in April may trigger a sharp drop in the price of Bitcoin, which is expected to drop to 42,000 USDT.

Nicholas’ logic error

On the surface, Nicholas’s logic is self-consistent but inconsistent with the facts. A common mistake is premise error. Nicholas used the wrong comparison.

Volatility is an indicator for allocating assets based on risk levels and is used to measure risk factors. Accordingly, the proportion of bonds, fixed deposits, gold, and stocks should be allocated. In terms of Volatility, Bitcoin is different from gold but similar to stocks. Allocating takes up the allocation quota of stocks, not gold. The picture below illustrates this clearly.

Gold-Bitcoin Tracking

The red line in this picture is the trend of Bitcoin, and the yellow line is the trend of gold. On the surface, the trends of the two are similar. Pay attention to the ruler on the right. Bitcoin is based on a scale of 100 times, while gold is increased by 600 yuan per scale. Although stored values have the same characteristics, the growth scale is entirely different. Bitcoin cannot be compared with gold. The gap between the two is manifested as two species. If this trend is confirmed, gold will be worth 2,400 USD, and bitcoin will be worth 1 million!

Going back to the beginning of the article, Nicholas said, “Given that Bitcoin is considered digital gold, the most similar asset is gold.” At best, he saw only the surface of the problem, could not think deeply, and did not seriously distinguish between the two. There are differences among those.

At worst, he is pretending to be confused and misleading the market.

There is no problem in being bearish, but you need to find a decent reason.

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