Crypto Frontline

The exchange rate on the most liquid cryptocurrency bitcoin has been surging higher as COVID-19 has spread across the globe. Both young and older investors are looking for an alternative to stocks and bonds as central banks flood the market with liquidity. The rapidly rising fiscal stimulus is putting money into consumers’ pockets and while some are spending their new cash, others are looking for investment vehicles to generate additional gains. It also appears that while young investors are more likely to put their cash in Bitcoin, older investors show more appreciation for gold.

Investments in Alternative are Split By Age

According to a recent piece by JP Morgan preferences in the best alternative investment are split by age. JP Morgan said, “The two cohorts show divergence in their preference for ‘alternative’ currencies”. A team of analysts said that both gold and bitcoin exchange-traded-funds have experienced strong inflows in the past five months, as both age groups see the potential in alternative currencies. Younger investors seem content purchase both bond funds and funds that have access to bitcoin. There are keen to stay away from bond funds. This is not the case with older investors who are more attracted to bond funds as well as gold.

The decline in the US dollar has been one of the reasons younger investors have been diving into bitcoin positions. The dollar has been coming under pressure as the US 10-year yield dropped to the lowest level in history near 50-basis points. The 10-year real yield has declined below zero. This means that is you subtracted year over year inflation, which can be calculated by looking at the Personal Consumption Expenditures core deflator which was last seen at 75-basis points, the 10-year real yield is now -25-basis points. This real yield is very unattractive to your investors, which has led many to flee the dollar.

Bitcoin Has Outperformed Gold Since March

The strong inflows into Bitcoin have allowed the cryptocurrency to outperform gold prices since hitting a low in March. This comes despite gold prices busting through the $2,000 mark in July. Gold prices have been on a tear, but have underperformed the rise seen in the exchange rate between bitcoin and the US dollar.

After hitting a low on the ratio between bitcoin and gold in March, the ratio of bitcoin to gold has rallied 220% from 2.56 to 5.70. The ratio between bitcoin and gold has recaptured the 50-week moving average which is seen near 5.33. Resistance on the ratio between bitcoin and gold is seen near a downward sloping trend line which 5.78. A break of this level would lead to a test of the 2020 highs at 6.88.

Short-term momentum on the ratio between bitcoin and gold has turned positive as the fast stochastic has generated a crossover buy signal. This has been confirmed bu the upward sloping RSI (relative strength index). Medium-term momentum has also turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) has crossed above the MACD signal line (the 9-week moving average of the MACD line. The MACD histogram is printing in the black with an upward sloping trajectory which points to a higher ratio.

Hedge Funds are Exiting Bitcoin While Small Investors are Diving In

Another interesting dynamic is that smaller investors are piling into bitcoin, while managed money accounts appear to be exiting those positions. According to the latest commitment of traders report released for the date ending July 11, 2020, large speculators reduced long position in futures and options by more than 3K bitcoin futures contracts while small speculators increased their long position by approximately the same number. This would mean that the smart money is not exiting these positions.

The Bottom Line

The upshot is that younger investors are now driving the value of bitcoin and looking at cryptocurrencies as an alternative to the US dollar. Older investors seem more content purchasing bond funds and gold as an alternative to the dollar and stocks. The dollar has been tumbling relative to other sovereign currency which is also helping gold prices hit record levels. While gold has hit a record high, bitcoin is still well off the highs that the cryptocurrency hit in December of 2017. Despite the strong demand for gold from older investors, it has underperformed bitcoin since hitting a low on the ratio between bitcoin and gold in March. Looking forward, younger investors seemed to be willing to place capital in stocks and bitcoin and should continue to be the driving force behind the movements in cryptocurrencies.