Will Bitcoin Replace Gold as a Safe Haven in 2021?

by JDH on December 26, 2020


No, Bitcoin will not replace gold as a safe haven in 2021.

There, I just saved you from having to read my disjointed ramblings on that subject.  For those who have time to kill on this Boxing Day weekend, here is a more detailed answer:

Yes, 2021 will be the year that Bitcoin enters the “mainstream” of “institutional” investing.  Obviously the tech world and crypto-geeks have played with Bitcoin for many years, but the Big Boyz are now also paying attention.

To be clear, I am NOT saying that the average investor will be in Bitcoin in 2021, primarily because there are still barriers to entry.  The most common way to buy any crypto currency is to register with an exchange, verify your identity, transfer fiat currency, buy the crypto, and then transfer it back to a secure hardware wallet.  That’s complicated, and beyond the reach of the average investor.

It is getting somewhat easier.  Platforms like Wealth Simple, and Paypal, and Square allow you to buy and/or transact in Bitcoin, but any platform can be hacked, so as they say, “not your keys, not your coins”, so if you aren’t holding it yourself, you don’t fully own it.  Sort of like gold; you can buy an ETF that holds physical metal, but that’s not the same level of security as holding the gold coins or bars yourself.

ETFs will gradually gain popularity, but they aren’t there yet.

There is the Grayscale Bitcoin Trust, GBTC, that holds Bitcoin, and it’s a good option for accredited or institutional investors.  They are currently closed to new investors (they close periodically a few times each year, so they will likely reopen again shortly) and you send them your money, they buy Bitcoin and give you an equivalent value in shares in the Trust.  You are prohibited from selling those shares for six months, so it is not designed to be a trading vehicle.  Anyone can buy the shares, GBTC, and that’s why they typically trade at a premium to Net Asset Value (around an 18% premium last time I checked) because you are getting the convenience of not having to wait six months, or have your own hardware wallet.

But, for Canadians, GBTC is not eligible to be held in registered accounts, so you can’t hold it in your RRSP or TFSA.

So if you want to hold Bitcoin in an RRSP or TFSA what can you do?

Not much, at the moment, and that’s why 2021 will not be the year that John or Jane Public goes all-in on Bitcoin.  (You could buy Microstrategy Incorporated, MSTR on Nasdaq, which holds a lot of Bitcoin, but it is not a pure Bitcoin play as there is also an underlying business).

It’s not impossible to hold crypto in your registered accounts.  A new option is The Bitcoin Fund by 3iQ Digital Asset Management, trading on the TSX ticker symbol QBTC and QBTC.U; it trades significantly over NAV, and is not huge, yet ($389 million NAV), but it’s an option if you really want registered exposure.

So while I don’t predict that the average person will be heavily into Bitcoin in the near future, it is now obvious that the Big Boyz are dipping their toes in it.

Why now?

Why not three years ago, around the last peak?

Three reasons:

First, real interest rates are now zero or less, so there is no place to park your cash, so you’re not losing interest by playing Bitcoin.

Second, Bitcoin is at or near new highs, so if you can make money on it, why not?

But there is a third and more important reason: others are doing it; you are not the first.

If you run a hedge fund, or an endowment, or are an advisor to a Family Office, and you recommend Amazon, and it goes down by 30%, does anyone criticize you?  No, because everyone else also owns Amazon, so if you are following the conventional wisdom, you won’t be criticized for it.

It’s just like in the old days when computers became popular.  If you were a big company, and bought IBM computers, no-one questioned your decision.  There were other computers that were cheaper, with better performance, but no middle manager would take a risk and buy a non-name brand, because if there was a problem, you got fired.  So you overpaid for Big Blue because it guaranteed job security, regardless of the outcome.

And so it is now with Bitcoin.

You want “alpha”.  You want to make money, so you know you need to have at least a small allocation to Bitcoin, but how do you explain it to your Board of Directors, who are a bunch of stodgy old men who don’t understand it?


You say

Everyone else is already doing it.  They are making money.  We don’t want to fall behind our competitors, so we have to jump in too.

Of course it’s not “everybody”, but it’s not nobody.  MicroStrategy raised $400 million and put it in Bitcoin, and now holds over 40,000 BTC. Hedge fund manager Stanley Druckenmiller likes it. Ray Dalio appears to be warming to Bitcoin.  There are others, and that gives “cover” for money managers to say “let’s dabble”.

A traditional portfolio might be 60% equities, 35% fixed income, 5% gold and cash.

Going forward it may still be 60% equities, but fixed income may drop to 25% or 35%, with the difference in gold and crypto.  The biggest holding will be Bitcoin, because it’s the biggest, but once you convince your investors that Bitcoin makes sense, you can convince them to increase the alpha by taking a small position in Ethereum (more correctly called Ether), and then you are off to the races.

It only takes a very small re-allocation to spike Bitcoin.  There is approximately $9 trillion of gold, above ground.  The market cap of Bitcoin is around $434 billion.  In contrast, the market cap of Tesla is over $600 billion.

So what happens to the price of Bitcoin if a small amount of the funds currently in gold, or Tesla, or anything else flow into Bitcoin?  The price of Bitcoin goes way up, that’s what.

And as the price increases, it will be in the news more, and more investors will say “I don’t want to miss it” so they put a few dollars in, nothing big, but if everyone puts a few dollars in, the price goes ballistic.

$100,000 Bitcoin in 2021 is entirely reasonable.

So how to play it?

Cautiously, I suggest, because it is very volatile.

If you want to play the game, do your research, and in particular understand how to store your coins.  The safest strategy is to wait for a correction to start buying (and you won’t have to wait long, it corrects all the time).

Then sit back, and watch the show!

(And don’t speculate with more than you are willing to lose, because you are buying air, after all).

Thanks, and enjoy the holidays.