As the world grapples with ongoing geopolitical uncertainty, investors are increasingly turning to gold and Bitcoin as a means of hedging against risk. According to a recent research note by JPMorgan, shared with Cointelegraph, this trend is expected to persist due to various factors, including structurally higher geopolitical uncertainty since 2022, persistent high uncertainty about the longer-term inflation backdrop, and concerns about ‘debt debasement’ due to persistently high government deficits across major economies.
Gold and Bitcoin as Important Components of Investors’ Portfolios
The research note highlights that gold and BTC have become increasingly important components of investors’ portfolios structurally. This is evident in the record capital inflow into crypto markets in 2024, which has led to a surge in demand for both assets. As JPMorgan notes, this trend is likely to continue as investors seek to diversify their portfolios and mitigate risks associated with geopolitical uncertainty.
The Debasement Trade: A Growing Phenomenon
The debasement trade refers to the increasing demand for gold and BTC due to factors such as:
- Structurally higher geopolitical uncertainty since 2022: The ongoing conflicts in various regions, including Ukraine and the Middle East, have led to a heightened sense of uncertainty among investors.
- Persistent high uncertainty about the longer-term inflation backdrop: The COVID-19 pandemic has led to a surge in inflation expectations, which is likely to persist due to factors such as supply chain disruptions and labor market shortages.
- Concerns about ‘debt debasement’ due to persistently high government deficits across major economies: The increasing fiscal deficits in major economies have raised concerns about the sustainability of their debt levels.
Investment Managers Flock to Bitcoin as a Hedge Against Inflation
Several investment managers, including Paul Tudor Jones, are increasingly turning to Bitcoin as a means of hedging against inflation. As Jones noted in an interview, "all roads lead to inflation" in the United States, making Bitcoin a attractive asset for investors seeking to mitigate risks.
US State Governments Add Bitcoin as a Hedge Against Fiscal Uncertainty
In addition to investment managers, US state governments are also adding Bitcoin as a hedge against fiscal uncertainty. In December, VanEck, an asset manager, noted that several states have been exploring the use of Bitcoin as a means of diversifying their portfolios and mitigating risks.
Open Interest on BTC Futures Surges
The surge in open interest on BTC futures is another indicator of growing demand for gold and Bitcoin. According to data from CoinGlass, net open interest on BTC futures rose from approximately $18 billion in January 2024 to upward of $55 billion in December. This represents a significant increase in the number of investors seeking to hedge against risks using Bitcoin.
Crypto ETF Inflows: A Key Metric for Investors
The inflows into crypto ETFs are among the most important metrics for investors to watch. As Citi noted in a recent report, these inflows are more likely than other trading activity to be new funds/market participants entering the crypto space. The surge in net assets of US Bitcoin ETFs broke $100 billion for the first time in November 2024, according to data from Bloomberg Intelligence.
Positive Demand Shocks: A Catalyst for BTC’s Price Surge
The surging institutional inflows could cause positive ‘demand shocks’ for Bitcoin, potentially sending its price soaring in 2025. As Sygnum Bank noted in a recent report, these demand shocks could have a significant impact on the price of Bitcoin.
Conclusion
In conclusion, the debasement trade into gold and Bitcoin is expected to persist due to various factors, including structurally higher geopolitical uncertainty since 2022, persistent high uncertainty about the longer-term inflation backdrop, and concerns about ‘debt debasement’ due to persistently high government deficits across major economies. As investors continue to seek ways of hedging against risks, gold and Bitcoin are likely to remain important components of their portfolios.
