Rising bitcoin ‘has gold-like value’, says JPMorgan

JPMorgan’s bullish long-term case for bitcoin forecasts the cryptocurrency doubling in value.

JPMorgan’s long-term case for bitcoin is based on the cryptocurrency’s potential as a “digital alternative to gold”. Picture: AFP

Bitcoin briefly broke through the $US60,000 barrier on Friday, ­returning to a near record high as the US securities regulator ­approved the listing of America’s largest digital currency exchange — widely seen as another win for the cryptocurrency.

The move came as brokerage JPMorgan compared bitcoin to gold as an investment class and slapped a long-term target of $US130,000 on the cryptocurrency — more than double the recent record high of $US61,742.

Bitcoin hit a two-week high of $US60,100 on Friday, although it later pulled back to $US57,500.

JPMorgan’s long-term case for bitcoin is based on the cryptocurrency’s potential as a “digital alternative to gold”.

The US investment bank’s long-term target for bitcoin — which assumes that the value of bitcoin will eventually equal the value of gold in investors’ port­folios — fell recently as the gold price also fell.

But while surging cryptocurrencies in the past two quarters have been accompanied by higher volatility that has limited the amounts that big fund managers could own, bitcoin volatility has fallen in recent weeks.

If that continues, it will have positive implications for the institutional adoption and the valuation of bitcoin, according to JPMorgan’s global market strat­egist, Nikolaos Panigirtzoglou.

“One major constraint to institutional adoption of bitcoin or other cryptocurrencies is their very high volatility,” Mr Panigirtzoglou said. “The reason is that, for most institutional investors, the volatility of each asset class matters in terms of portfolio risk management and the higher the volatility of an asset class, the higher the risk capital consumed by this asset class. However over the past weeks, we started seeing the first signs of bitcoin volatility peaking and subsiding from its end-February highs.”

In his view, a normalisation of bitcoin volatility may reinvigorate demand from big fund managers for the cryptocurrency at the expense of gold.

Moreover, bitcoin’s “competition” with gold means that its volatility relative to the yellow metal matters even more than the absolute bitcoin volatility.

His expectation is that bitcoin’s competition with gold as an “alternative” currency will continue over the coming years given that millennials will over time become a more important component of investors’ universe and given their preference for “digital gold” over traditional gold.

“Considering how big the fin­ancial investment into gold is, any such crowding out of gold as an ‘alternative’ currency implies big upside for bitcoin over the long term,” Mr Panigirtzoglou said.

With private ownership of gold amounting to 43,726 tonnes, or $US2.4 trillion ($3.15 trillion) including gold ETFs, bitcoin would have to rise to $US130,000 to match the total private sector investment in gold via ETFs or bars and coins at the current price of gold of just over $US1700 an ounce, he estimated.

But it was “unrealistic” to expect that the allocations to bitcoin by institutional investors would match those of gold without a convergence in volatilities.

“A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is likely a multi-year process,” Mr Panigirtzoglou said. “This implies that the above $US130,000 theoretical bitcoin price target should be considered a long-term target.”

However, given that the bitcoin to gold volatility ratio has never been below 2.0 times, $US65,000 per bitcoin should be considered as an “upper bound of its fair value range for the foreseeable future”.

Still, the cryptocurrency is also likely to be more widely adopted by institutional investors for multi-asset portfolios because its correlation to traditional asset classes has shifted towards pre-pandemic levels, making it more attractive from a diversification point of view and less ­vulnerable to any further appreciation in its denominator, the US dollar.

“There was a marked increase in these correlations during 2020, but in recent months they have shifted lower towards pre-pandemic levels, making bitcoin more attractive in multi-asset portfolios from a diversification point of view and less vulnerable to any further dollar appreciation,” Mr Panigirtzoglou said.

Meanwhile Coinbase, one of the largest digital currency exchanges in the world, said on Thursday the US Securities and Exchange Commission had approved its application to list in New York. The US digital currency exchange, valued privately at $US68bn, said it expected its shares to begin trading on the Nasdaq exchange on April 14.

Its direct listing will be the first time a large company’s shares has listed directly without a previous sale to institutional investors.