JPMorgan says bitcoin's 'digital gold' narrative is under pressure, highlights gold's strength in debasement trade

Bitcoin's narrative as "digital gold" is facing pressure, while gold continues to see stronger demand, according to JPMorgan analysts.

"Bitcoin's volatility and correlation with equities raises questions over its 'digital gold' narrative," JPMorgan analysts, led by managing director Nikolaos Panigirtzoglou, wrote in a report Wednesday shared with The Block. "Looking forward, we see gold continuing to rise as the major beneficiary of the debasement trade."

The debasement trade is a strategy focused on buying assets like gold and bitcoin to hedge against inflation, long-term debt and weakening fiat currencies. Gold's sharp rise to above $3,100 per ounce this year reflects the "intensification" of the debasement trade, the analysts said — meaning investors are increasingly favoring gold over bitcoin. "Bitcoin, the other perceived component of the debasement trade, underperformed YTD [year to date] given its previous outperformance by the end of 2024 and given its naturally higher volatility, risk and correlation with technology stocks," the analysts said.

Spot bitcoin exchange-traded funds (ETFs) have also seen outflows over the past two months, in contrast to continued inflows into gold ETFs — signaling a shift by private investors toward gold during February and March — the analysts noted. Bitcoin futures positions have also turned negative since mid-January, while gold futures have stayed flat. This suggests that recent demand for gold is likely coming from private investors and central banks, rather than speculative traders, the analysts said.

Strong gold buying from both central banks and private investors has pushed global allocations to gold to a record high. The analysts estimate that about $9 trillion, or 3.5% of global financial assets, is now held in gold — split between $4 trillion held by central banks and $5 trillion by private investors.

As for bitcoin, its current price of around $83,700 is still trading above its estimated production cost of $62,000, "which has historically acted as an empirical lower bound for bitcoin prices," the analysts said. They also placed bitcoin's volatility-adjusted value at around $71,000, based on a comparison to the $5 trillion in privately held gold and accounting for bitcoin's higher risk.

When asked if the $62,000 and $71,000 levels could be seen as support for bitcoin, Panigirtzoglou told The Block: "Yes it could be viewed this way especially the production cost [$62,000] which historically acted as floor."