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Why Bitcoin ETFs May Outperform Gold ETFs in the Long Run

Why Bitcoin ETFs May Outperform Gold ETFs in the Long Run

Gold and bitcoin are often compared as alternative assets that can hedge against inflation, currency devaluation, and geopolitical risks. Both have limited supply, global demand, and no central authority. Both have also attracted the attention of investors who seek to diversify their portfolios and gain exposure to the potential upside of these assets.

However, gold and bitcoin are not the same. Gold has a long history of being used as a store of value and a medium of exchange, while bitcoin is a relatively new invention that relies on cryptography and blockchain technology. Gold is tangible and physical, while Bitcoin is digital and virtual. Gold is widely accepted and regulated, while bitcoin is still controversial and volatile.

These differences have implications for the performance and prospects of gold and bitcoin exchange-traded funds (ETFs), which are investment vehicles that track the prices of these assets and allow investors to buy and sell them on stock exchanges. Gold ETFs have been around since 2003, and have grown to more than a $200 billion industry in 2023, with SPDR Gold Shares (NYSE:GLD) being one of the largest. Bitcoin ETFs, on the other hand, have only been approved and launched in the U.S. in January 2024, after years of rejections and delays by the Securities and Exchange Commission (SEC). As of January 13, 2024, there are 19 bitcoin ETFs trading, with ProShares Bitcoin Strategy ETF (BITO) being the first and the largest fund.

In this article, I will argue that bitcoin ETFs may outperform gold ETFs in the long run, based on the following reasons:

  • Bitcoin has a higher growth potential and scarcity than gold
  • Bitcoin ETFs have lower fees and higher returns than gold ETFs
  • Bitcoin ETFs have more innovation and diversification than gold ETFs

Bitcoin has a higher growth potential and scarcity than gold

One of the main drivers of the value of gold and bitcoin is their scarcity, which means that their supply is limited and cannot be easily increased. Gold has a finite amount of 190,040 metric tons that can be mined from the earth, of which about 80% has already been extracted. Bitcoin has a fixed supply of 21 million coins, of which about 19 million have already been mined. However, the rate of new supply of gold and bitcoin is not the same. Gold production has been declining in recent years, due to the depletion of reserves, the rising costs of mining, and the environmental and social impacts of the industry. Bitcoin production, on the other hand, is predetermined by an algorithm that halves the reward for miners every four years, until the last bitcoin is mined around 2140. This means that the annual inflation rate of gold is around 1.5%, while the annual inflation rate of bitcoin is around 1.8% and will drop to zero in the future.

This difference in supply dynamics has implications for the demand and price of gold and bitcoin. Gold demand is mainly driven by jewellery, investment, and central bank purchases, which are influenced by factors such as income, wealth, interest rates, inflation, and geopolitical events. Bitcoin demand is mainly driven by speculation, adoption, and innovation, which are influenced by factors such as technology, regulation, network effects, and social sentiment. While both gold and bitcoin have seen increased demand in recent years, due to the global economic and health crisis, the stimulus measures, and the low interest rates, bitcoin has shown faster and stronger growth than gold, due to its novelty, accessibility, and potential. According to the World Gold Council, the annual average gold price rose from $1,481 per ounce in 2019 to $1,769 per ounce in 2020, and then to $1,794 per ounce in 2021, representing a cumulative increase of 21.1%. While data on CoinMarketCap shows that the annual average bitcoin price rose from $7,344 per coin in 2019 to $11,449 per coin in 2020, and then to $46,788 per coin in 2021, representing a cumulative increase of 537.1%.

These trends suggest that bitcoin has a higher growth potential and scarcity than gold, which could translate into higher returns for bitcoin ETFs than gold ETFs in the long run. While gold has a more established and stable market, bitcoin has a more disruptive and dynamic market, which could offer more opportunities and rewards for investors who are willing to take more risks and embrace more changes.

Bitcoin ETFs have lower fees and higher returns than gold ETFs

Another factor that affects the performance of gold and bitcoin ETFs is their fees and returns, which reflect their costs and benefits. Fees are the expenses that investors pay to the fund managers for managing and operating the ETFs, which reduce the net returns that investors receive from the ETFs. Returns are the profits or losses that investors earn or incur from the ETFs, which depend on the price movements of the underlying assets and the dividends or distributions that the ETFs payout.

Generally speaking, bitcoin ETFs have lower fees and higher returns than gold ETFs, which could make them more attractive and profitable for investors. Based ETF Database, the average expense ratio of the 10 gold ETFs trading in the U.S. is 0.42%, while the average expense ratio of the 17 bitcoin ETFs trading in the U.S. is 0.33%. This means that bitcoin ETFs charge less fees than gold ETFs for providing the same service of tracking the prices of the assets. Moreover, according to ETF.com, the average year-to-date return of the 10 gold ETFs trading in the U.S. is -0.76%, while the average year-to-date return of the 17 bitcoin ETFs trading in the U.S. is 7.54%. Again, this means that bitcoin ETFs have generated more profits than gold ETFs for the same period.

These differences in fees and returns can have a significant impact on the long-term performance and compounding of gold and bitcoin ETFs. For example, assuming an initial investment of $10,000 and an annualized return of 7% for both gold and bitcoin ETFs, but a difference of 0.1% in expense ratio, the gold ETF with a 0.4% expense ratio would grow to $38,696 after 20 years, while the bitcoin ETF with a 0.3% expense ratio would grow to $39,346 after 20 years, representing a difference of $650 or 1.7%. This gap would widen even more if the difference in expense ratio or the difference in return is larger.

Therefore, bitcoin ETFs have lower fees and higher returns than gold ETFs, which could make them more attractive and profitable for investors in the long run. While gold ETFs have lower volatility and risk than bitcoin ETFs, bitcoin ETFs have lower costs and higher rewards than gold ETFs, which could outweigh the trade-offs for investors who have a longer time horizon and a higher risk tolerance.

Bitcoin ETFs have more innovation and diversification than gold ETFs

A third factor that affects the performance and prospects of gold and bitcoin ETFs is their innovation and diversification, which reflect their variety and quality. Innovation is the process of creating and introducing new products and services that meet the needs and preferences of customers and markets. Diversification is the strategy of investing in different types of assets and sectors that have low or negative correlation with each other, which can reduce the overall risk and volatility of a portfolio.

Generally speaking, bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. While doing research, I spoke to a gold ETF analyst last week and he based on his point of view and shared the following with me. The gold ETFs trading in the U.S. have only two types of strategies: physical gold ETFs, which hold gold bullion in vaults, and gold miner ETFs, which invest in stocks of companies that mine and produce gold. These ETFs have similar characteristics and performance and are highly correlated with each other and with the gold price. The average correlation coefficient of the gold ETFs trading in the U.S. is 0.94, which means that they move almost in the same direction and magnitude.

On the other hand, the bitcoin ETFs trading in the U.S. have four types of strategies: spot bitcoin ETFs, which hold bitcoin directly in custody, futures bitcoin ETFs, which invest in bitcoin futures contracts, short bitcoin ETFs, which bet against the decline of bitcoin futures, and blockchain and bitcoin ETFs, which invest in stocks of companies and other ETFs with exposure to cryptocurrency and blockchain technology. These ETFs have different characteristics and performance and are less correlated with each other and with the bitcoin price. The average correlation coefficient of the bitcoin ETFs trading in the U.S. is 0.77, which means that they move somewhat in the same direction and magnitude, but not always.

These differences in innovation and diversification can have a significant impact on the long-term performance and stability of gold and bitcoin ETFs.

Bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. For example, spot bitcoin ETFs, such as BlackRock (NYSE:BLK) Bitcoin Strategy ETF (BTCR) and VanEck Bitcoin Trust (XBTF), offer the most direct and simple way to invest in bitcoin, as they track the spot price of bitcoin and hold bitcoin in custody with qualified custodians, such as Fidelity Digital Assets and Coinbase (NASDAQ:COIN) Custody. Futures bitcoin ETFs, such as ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF), offer a more indirect and complex way to invest in bitcoin, as they track the futures price of bitcoin and invest in bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME), which are cash-settled and do not involve the delivery of bitcoin. Short bitcoin ETFs, such as Simplify Short Bitcoin Strategy ETF (SBTC) and Direxion Daily Bitcoin Bear 1X Shares (BITD), offer a way to profit from the decline of bitcoin, as they track the inverse of the futures price of bitcoin and invest in short positions of bitcoin futures contracts traded on the CME. Blockchain and bitcoin ETFs, such as Amplify Transformational Data Sharing ETF (BLOK) and Bitwise Crypto Industry Innovators ETF (BITQ), offer a way to invest in the broader cryptocurrency and blockchain industry, as they invest in stocks of companies and other ETFs with exposure to cryptocurrency and blockchain technology, such as Coinbase, MicroStrategy, and Grayscale Bitcoin Trust.

These different types of bitcoin ETFs offer different advantages and disadvantages for investors, depending on their risk appetite, return expectation, and investment objective. For instance, spot bitcoin ETFs have the lowest tracking error and the highest correlation with the bitcoin price, but they also have the highest fees and the highest regulatory uncertainty, as they are subject to the PSA requirements and the potential actions of the SEC. Futures bitcoin ETFs have lower fees and lower regulatory uncertainty, as they are subject to the SFA requirements and the existing rules of the CME, but they also have higher tracking error and lower correlation with the bitcoin price, due to the futures premium, contango, and rollover costs. Short bitcoin ETFs have the potential to generate positive returns when the bitcoin price falls, but they also have the potential to incur unlimited losses when the bitcoin price rises, as well as high fees and high volatility. Blockchain and bitcoin ETFs have the potential to capture the growth and innovation of the cryptocurrency and blockchain industry, but they also have the potential to suffer from the volatility and risk of the stock market, as well as the diversification and dilution of their exposure to bitcoin.

Therefore, bitcoin ETFs have more innovation and diversification than gold ETFs, which could make them more competitive and resilient for investors. While gold ETFs have more simplicity and stability than bitcoin ETFs, bitcoin ETFs have more variety and quality than gold ETFs, which could offer more options and solutions for investors who have different needs and preferences.

Conclusion: Bitcoin ETFs may outperform gold ETFs in the long run

In conclusion, I believe that bitcoin ETFs may outperform gold ETFs in the long run.

While gold ETFs have their own merits and advantages, such as lower volatility, lower risk, and lower correlation with other assets, I think that bitcoin ETFs have more merits and advantages, such as higher growth, higher reward, and higher innovation, which could outweigh the trade-offs for investors who have a longer time horizon and a higher risk tolerance.

I think that bitcoin ETFs are not only a viable alternative to gold ETFs but also a superior one, as they offer more value and opportunity for investors who seek to diversify their portfolios and gain exposure to the potential upside of digital gold.

Source: https://in.investing.com/analysis/why-bitcoin-etfs-may-outperform-gold-etfs-in-the-long-run-200608903

FAQ

Why does the author, Anndy Lian argue that bitcoin ETFs may outperform gold ETFs in the long run?

The author, Mr Anndy Lian argues that bitcoin ETFs may outperform gold ETFs due to Bitcoin's higher growth potential and scarcity, lower fees, and higher returns compared to gold ETFs. Additionally, the author emphasizes the innovative and diversified nature of bitcoin ETFs, suggesting they offer more opportunities for investors.

What factors contribute to the higher growth potential of bitcoin compared to gold, according to the article?

Anndy Lian states that the higher growth potential of bitcoin compared to gold is attributed to the predetermined supply dynamics of both assets. While gold production has been declining, Bitcoin's algorithm-controlled supply and halving reward for miners contribute to its higher growth potential and scarcity.

How does Anndy Lian highlight the cost-effectiveness of bitcoin ETFs over gold ETFs?

Anndy Lian points out that, on average, bitcoin ETFs have lower fees (expense ratios) compared to gold ETFs. The lower fees, coupled with higher returns for bitcoin ETFs, make them more cost-effective and potentially more profitable for investors.

What role does innovation and diversification play in the comparison between gold and bitcoin ETFs?

Anndy Lian suggests that bitcoin ETFs have a competitive edge over gold ETFs in terms of innovation and diversification. Bitcoin ETFs offer different strategies, including spot bitcoin ETFs, futures bitcoin ETFs, short bitcoin ETFs, and blockchain and bitcoin ETFs, providing investors with more variety and potentially better risk management.

How does the author address the potential risks associated with investing in different types of bitcoin ETFs? different types of bitcoin ETFs?oes the author address the potential risks associated with investing in different types of bitcoin ETFs?

Anndy Lian acknowledges that each type of bitcoin ETF comes with its own set of advantages and disadvantages, such as regulatory uncertainty, tracking error, correlation with bitcoin prices, fees, and potential exposure to stock market volatility. The article suggests that investors should carefully consider their risk appetite, return expectations, and investment objectives when choosing among different types of bitcoin ETFs.

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

Lunar New Year Chinese visitors to Singapore, Hong Kong help revive gold post-Covid

Lunar New Year Chinese visitors to Singapore, Hong Kong help revive gold post-Covid
  • ‘We have seen an increase in visitors … certain Chinese customers, who have not been buying from us for a long time, have resumed’, one trader said
  • Gifts of gold at Lunar New Year are thought to bring luck to both giver and receiver. China is the biggest consumer and producer of the precious metal

 

 

China’s reopening ahead of the Lunar New Year holiday has brought back the lustre of gold in two of Asia’s most important financial hubs – Hong Kong and Singapore.

A steady stream of Chinese visitors since borders reopened on January 8 has stoked up premiums on gold – a mark-up paid to secure speedy deliveries and cover overhead costs – by around 300 per cent to US$3 an ounce from a year ago, dealers say.

Spot gold prices – what the customer on the street actually pays – are hovering around an eight-month peak of US$1,900 an ounce in global markets.

“It’s early days yet, but we have definitely seen an increase in visitors over the past week. Certain Chinese customers, who have not been buying from us for a long time, have resumed,” said Padraig J Seif, Founding Partner of the Hong Kong based-Precious Metals Asia.

Traditionally, gold buying peaks in the run up to Lunar New Year, which this year falls on January 22. Visitors from the mainland like to shop in Hong Kong and Singapore because of the high quality of precious metal products such as jewellery and coins.

“Gold holds a special place for Chinese people, it symbolises wealth and prosperity, making it a popular choice for Lunar New Year gifting,” said Hong Kong-based Chow Tai Fook Jewellery Group in a statement, adding that it had seen an increase in gold purchases recently and was expecting a “surge in demand for bridal jewellery as 2023 is considered to be an auspicious year for couples looking at tying the knot”.

Buying momentum likely to increase

Around 64,000 mainland Chinese visitors have streamed into Hong Kong since borders reopened. That flow is expected to increase as a quota of 50,000 travellers per day across four land border checkpoints will be raised to 65,000 a day for four days from Wednesday.

City authorities have also announced that they would increase the number of daily rail tickets from Wednesday.

The momentum in gold sales is expected to last even after the holiday season because of around two years of pent up demand, as many Chinese people are still reluctant to travel because of Covid-19 but are expected to gradually start taking trips.

The holiday season also arrived earlier this year, as it often falls in February. Beijing’s abrupt U-turn on zero-Covid in late December surprised many people and did not give them enough time to firm up travel plans before Lunar New Year.

Gold has long been considered a way to store and lock in value, and demand for it spiked in Asian markets in the initial months of the pandemic in 2020 because of a climate of uncertainty. But the bullion trade in Asian hubs crashed soon after China imposed travel restrictions.

“Lot of people stopped buying because they were experiencing financial difficulties,” said Seif, whose sales revenue in the first two weeks of January has already surpassed that of the entire month a year ago.

It’s not just retail buyers of jewellery, either – long term investors are also turning back to gold. The US Federal Reserve is expected to this year soften its aggressive rate increases, which could make returns on the precious metal higher than on interest-bearing bonds.

Investors have also gravitated towards the precious metal because of its safe haven appeal due to geopolitical tensions such as the Russia-Ukraine war and the looming prospect of a global recession.

Investment bank Goldman Sachs expects gold to trend even higher than it is now later this year, at around US$1,950 an ounce.

Demand in China, the world’s largest gold consumer and also the biggest producer of the precious metal, is expected to have an important bearing on prices.

Like Hong Kong, Singapore’s gold trade is also benefiting from China scrapping travel restrictions with the city state bracing for overall visitor arrivals to rise to 12-14 million, around double the year before.

“Chinese gold demand is expected to drive the global market this year,” said Spencer Campbell, the Singapore-based director of SE Asia Consulting Pte Ltd.

“With the easing of restrictions in China, retail demand for gold is expected to increase in Singapore and Hong Kong as more people shop for gifts and jewellery to celebrate the Lunar New Year.”

Demand has picked up across Asia since late last year, he added.

Indian consumers – in second place after their Chinese counterparts – bought a record amount of the metal in the fourth quarter of last year.

Some Asian investors have switched to precious metals from cryptocurrencies after one of the largest global exchanges, FTX, went bankrupt in November following a surge in customer withdrawals.

Bitcoin, one of the most actively-traded currencies that soared to an all-time high of US$69,000 in November 2021, is now trading at around US$21,000.

However, one Singapore-based fund manager appeared unimpressed by gold’s charms and said savvy investors can take advantage of cryptocurrency volatility, with traders buying at low prices and selling when they rise.

“Gold may be a safe haven” but there were many other opportunities elsewhere for investors “to profit from price fluctuations”, said Anndy Lian, a partner at the Singapore-based Passion Venture Capital and author of the book NFT: From Zero to Hero.

Bullion dealers have said the increased purchasing of gold following China’s reopening is likely to last until the end of the first quarter. Chinese appetite for gold could well continue at the same brisk pace throughout the year if the economy revives and incomes bounce back, they noted.

 

Source: https://www.scmp.com/week-asia/article/3207411/lunar-new-year-chinese-visitors-singapore-hong-kong-help-revive-gold-post-covid

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j