finweek

Is Bitcoin the new gold?

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There is a way for retail investors to enter the market of cryptocurrencies. Extreme care should be taken, though.


Most of us probably know somebody who has bought Bitcoin and burnt their fingers in the process. Just think of the local MTI scam that was recently crowned as the biggest crypto swindle in the world.

Cryptocurrencies are digital or virtual currencies that are secured through cryptographics, which makes it almost impossible to counterfeit. These currencies are based on blockchain technology running on decentralised computer networks.

Elon Musk’s Tesla recently announced that the company has invested $1.5bn in Bitcoin and that it would now accept the cryptocurrency as legal tender. Visa also recently indicated that cryptocurrencies would be playing a bigger role in its business dealings.

Buying gold in times of uncertainty has always been the traditional way of hedging a portfolio. After all, it serves as protection against inflation. Bitcoin recently hit a high of $50 000/unit, compared with the price of gold, which has struggled to break through the level of $1 900 an ounce. The point of separation between Bitcoin and gold was reached as early as November last year and proved that Bitcoin was the better choice.

I reckon that Bitcoin has become the digital equivalent of gold. The two assets have several similar and beneficial properties. Bitcoin is easily exchangeable and is divisible, whereas gold is more durable. Bitcoin will also be more readily accepted as legal tender.

The other question is of course whether Bitcoin’s recent price action isn’t simply another bubble.

I do believe that it’s different this time as the world adapted very quickly to adopt something new.

What makes cryptocurrencies an attractive investment option?

Greed and fear are the drivers behind cryptocurrencies like Bitcoin. Supporters of Bitcoin argue that the recent price movement is not comparable to any of the previous euphoric price movements as the asset has improved its reputation with institutional investors entering the market.

Zero and negative returns on traditional assets, such as government bonds are forcing asset managers to look for alternatives. There is a constant fear of asset managers missing these crypto price movements.

Investments in a cryptocurrency exchange-traded fund obviate any problems experienced with complex storage and security procedures that are required from people investing directly in cryptocurrencies.

The choice that one must therefore make is whether you want to track the price movement of a specific cryptocurrency, driven by greed and fear or whether you want to invest in the underlying technology. Do not confuse these two aspects with one another.

As the price of Bitcoin is in an overbought area, one should be careful when buying. However, it’s true that the Amplify Transformational Data Sharing exchange- traded fund (ETF) has caught my eye. It’s an app-ETF if one believes in the underlying technology of cryptocurrencies.

But should you buy?

This exchange-traded fund invests in businesses that are involved in blockchain technology (the technology behind cryptocurrencies). There are not many peers to the fund.

The ETF has increased in value considerably since March 2020. The recent price movement is at a slope of 75 degrees, which makes the ETF risky to invest in now.

A healthy slope for any asset is about 45 degrees.

This gives an indication that the “value” area of the ETF is in the region of $44/share.

Therefore wait for a slight correction in the price before you buy.

The alternative – if you believe that the upwardly strong price movement will continue – is that you get less exposure in the ETF, so buy at current levels. Should the price then correct further, you can increase your exposure to improve your average purchase price. This option is of course quite risky.

Also remember the positive correlation between this ETF and those of other cryptocurrencies.

As the ETF is showing very strong upward momentum, the price action could keep on moving upward, but it’s in an overbought area – which increases the possibility of a sudden correction. Momentum is the energy behind the price movement to help the price action so that it keeps on moving in a certain direction.

The ETF also remains in its 200-day moving average. This places the ETF in a bull trend. I will become very worried about a further drop in price if it reaches $35. A target price depends on your investment term.

I once again emphasise the fact that any exposure to cryptocurrencies or derivatives, such

But should you buy?

This exchange-traded fund invests in businesses that are involved in blockchain technology (the technology behind cryptocurrencies). There are not many peers to the fund.

The ETF has increased in value considerably since March 2020. The recent price movement is at a slope of 75 degrees, which makes the ETF risky to invest in now. A healthy slope for any asset is about 45 degrees. This gives an indication that the “value” area of the ETF is in the region

as the ETFs that track the price movement of these currencies or any funds that mimic the technology of these cryptocurrencies are extremely risky. So make sure that you can handle this risk and that it fits in with your investment strategy.

Read more
This article originally appeared in the 4 March edition of finweek. You can buy and download the magazine here.


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