BTF ETF: Bitcoin Challenging Gold As A Hedge

In times of uncertainty when the stock market is volatile, it is important to hedge, especially if you are not all into cash. Now, the rhetoric most commonly heard is to invest in gold, but, going against the trend, the aim of this thesis is to assess whether it is not Bitcoin (BTC-USD) that you should opt for.

For this purpose, the Valkyrie Bitcoin Strategy ETF (NASDAQ:BTF) provides exposure to Bitcoin futures as I will detail later, but, a look at the price action shows that it has produced above 60% upside since the beginning of 2023.

This double-digit price performance exceeding the 50% mark may seem something of an anachronism during current market conditions where volatility reigns, while at the same time, a comparison with other asset classes including gold helps to put things into perspective.

Bitcoin beating all, including Gold

The chart below shows that Bitcoin has beaten all the other asset classes whether it is bonds, gold, the Nasdaq Composite, as well as the S&P 500.

Looking closer, while Bitcoin started to outperform the S&P 500 earlier, it was only at the beginning of March that the degree of outperformance widened, which coincided with the start of the banking turmoil. It even outperformed the Nasdaq Composite index, skewed towards mega-cap tech growth stocks by about 40% as shown above. Thus, the digital currency which, by the way, is the product of blockchain technology and was more correlated with tech back in 2022 now outperforms the technology sector by a hefty margin.

The reason for Bitcoin’s strength could be that with the banking turmoil, some investors have started to see crypto as the perfect asset class, not correlated to others, even U.S. government bonds. Noteworthily, it is these bonds, especially the long-dated treasuries which are considered risk-free but are to be partly blamed for banks’ woes as they suffered from devaluation caused by rising interest rates. Now, since the troubled regional banks held a lot of these, the value of their assets fell, in turn creating liquidity problems, and, tellingly, few had predicted that interest rate risks would cause cracks to appear in the liquidity front through U.S. treasuries.

Consequently, Bitcoin was not a cause of the bank runs.

Along with bank troubles, the high debt-to-GDP ratio has come into focus as a result of the need to raise the debt ceiling, causing some to have doubts about the financial system itself, which brings us to crypto’s original role which was precisely to revolutionize the financial system. Thus, some investors found solace in the digital currency, as in parallel gold failed to rise parabolically as had been predicted by some since 2021. On the contrary, it was the digital currency that prevailed delivering gains of above 232% over a five-year period, despite being much more volatile as pictured below.

Noteworthily, gold still underperformed the digital currency despite a major loss of confidence from November last year with the advent of the FTX collapse, which was a crypto exchange platform headed by Sam Bankman-Fried. This prompted many investors to sell as Bitcoin’s price took a monumental hit and touched the $15.4K level, not seen since May 2020 and the market cap plunged to about $305 billion.

Thus, crypto is not without risks.

Volatility Risks

Here, some will remember the systemic risks or risks pertaining to the crypto ecosystem as a whole with the demise of Genesis, and others triggered by the implosion of FTX which caused the cryptocurrency loan and brokerage company to suspend lenders’ ability to withdraw their cryptocurrencies.

Consequently, there could also be a domino effect impacting stakeholders as companies involved in crypto-related transactions face a more challenging regulatory environment as the FTX crash and the banking turmoil gave the Security and Exchange Commission the perfect excuse to pounce, resulting in market makers like Jane Street and Jump planning to shift their activities offshore to more crypto-friendly jurisdictions. In addition, the Commodities Futures Trading Commission (CFTC) filed a lawsuit against Binance (BNB-USD), the crypto exchange, for offering certain derivatives products.

In addition to regulatory actions, liquidity conditions have also deteriorated especially for smaller exchanges in the wake of the banking turmoil, especially with the demise of Silvergate Capital (OTC:SICP) and the closure of its SEN (Silvergate Exchange Network) and others which enable the exchange of dollars for Bitcoin.

The Case for Investing in BTF

Despite all these pains, more people have been attracted to BTF as shown by the chart below which spans from November to May, a period…