The Growing Potential Demand for Bitcoin
Last week, I provided context on the significant buying pressure that Bitcoin is experiencing. However, there is another, potentially even larger, source of demand entering the scene.
We are already aware that Bitcoin ETFs, MicroStrategy's issuance of more shares to buy Bitcoin, Tether's constant buying, and the halving will all contribute to the major sources of demand in this cycle. In fact, in the first two weeks of trading alone, the "newborn 9" accumulated 125,000 BTC. While this has been offset by outflows from GBTC, it is unlikely that all GBTC holders are captive sellers who will exit the market immediately. We can expect this outflow to decrease in the coming weeks.
An Unexpected Development in China
A somewhat unexpected development is emerging in China, of all places. Those who follow my content on bitcoinandmarkets.com are already familiar with what has been happening in China over the past couple of years. The country is going through an end-of-an-economic-model transition. The China we have come to know was built on debt, producing goods for over-indebted foreign customers. It heavily relied on globalization and a highly elastic monetary environment. However, this era is coming to an end, and the crash of the Chinese real estate market and their stock market are visible signs of this paradigm shift.
On January 24, China Asset Management Company (China AMC), a massive fund manager and ETF provider in China, halted trading on their Nasdaq 100 and S&P 500 ETFs to prevent money from flowing out of other funds and into these US-connected funds. On Tuesday, other US-connected ETFs on Chinese markets opened limit up and had a 21% premium over NAV. Even Chinese-based Japanese ETFs were affected by the flight to safety, with the China AMC's Nomura Nikkei 225 ETF rising over 6% to a 22% premium.
Chinese investors are currently in full panic mode, and the authorities are trying to restrict capital flight. However, it is only a matter of time before more Chinese investors turn to Bitcoin as a store of value and for its portability. Many Chinese individuals are already familiar with Bitcoin, as China used to be a dominant source of demand until the CCP banned it in 2021.
Although Bitcoin is officially banned in Mainland China, investors can still use exchanges like Binance and OKX, as well as buy OTC or through off-shore bank accounts. Hong Kong, on the other hand, publicly opened up to Bitcoin last year and has been following US regulators in giving Bitcoin official recognition. It is highly unlikely that Hong Kong authorities would advocate for the legalization of Bitcoin only to ban it the following year.
A recent Reuters article quoted a senior executive from a Hong Kong-based Bitcoin exchange, confirming the capital flight story. The executive stated, "Investment on the mainland [is] risky, uncertain, and disappointing, so people are looking to allocate assets offshore… Almost every day, we see mainland investors coming into this market." The same source emphasized that Chinese brokerages, facing a sluggish stock market and weak demand for IPOs, need a growth story to tell their shareholders and the board.
Bitcoin's Prominent Role in a Changing World
Bitcoin has long been seen as a parallel world of green shoots, and now its importance is being recognized worldwide.
The flows from China will be a significant source of demand in this cycle, and the approval of Bitcoin spot ETFs in the US will create a perfect synergy by allowing sophisticated foreign investors to buy Bitcoin and US-based assets simultaneously.
It is also important not to overlook the struggling European markets. Europe is likely already in a recession, with EU factory activity contracting for 18 consecutive months by December. Germany narrowly avoided a technical recession, but its GDP for 2023 was negative at -0.2%. In a world of capital flight and negative growth, Bitcoin's relative attractiveness is very high. While some Bitcoiners are concerned that a recession could trigger a stock market crash, forcing the selling of Bitcoin as it did in March 2020, this time it might be different. As investors realize that the old system is stagnant and decaying, Bitcoin's unique properties as a revolutionary technology, a fixed supply asset, and a potential for economic growth will make it an attractive haven for capital.
The Current Price Performance of Bitcoin
Bitcoin's price performance since the launch of ETFs has been disappointing. However, considering the FTX receivership selling $1 billion worth of GBTC and other large entities selling GBTC to rotate into lower capital fees of the new ETFs, the price has held up extremely well.
The RSI (Relative Strength Index) is one of the most widely used indicators and has a Schelling point effect. Many people and bots watch for the daily RSI to hit oversold levels. Therefore, it is unlikely that we will see any significant upside in price until the RSI breaks above 30. This can be achieved through another sell-off into support, given that we are already close to the 30 level. Another possibility, although less likely, is the formation of a hidden bullish divergence, where the price makes slightly higher lows while the RSI makes lower lows. However, I do not anticipate any significant downside either due to the confluence of demand described above. We are currently at a temporary stalemate.
Zooming in on the daily chart, we can see that the 100-day moving average is currently providing support. Additionally, the $37,877 level, an important price from November, is also being closely watched. Any dip that pushes the RSI into oversold territory is not expected to close below that level.
Typically, the 100-day moving average does not provide strong support in Bitcoin, with the 50- and 200-day moving averages being more influential. However, looking back at September 2020, right before the monster bull rally that ended the year, the 100-day moving average played a significant role. It is possible for Bitcoin to hold along the 100-day moving average and then rally with a pause in GBTC selling. Another interesting note from that period in 2020 is that the RSI stopped just shy of oversold levels, catching many off guard as Bitcoin soared. While this is not my base case, it is worth considering given the historical precedent.
Conclusion
In conclusion, we are witnessing massive and new sources of demand for Bitcoin, including ETFs and China's capital flight. The dynamics surrounding the ETF launch have been complex, but the price of Bitcoin has remained relatively stable, considering the circumstances. It is only a matter of time before the impact of this demand becomes apparent in the price.
Frequently Asked Questions
Is gold buying a good retirement option?
While buying gold as an investment may seem unattractive at first glance it becomes worth the effort when you consider how much gold is consumed worldwide each year.
The best form of investing is physical bullion, which is the most widely used. However, there are many other ways to invest in gold. Research all options carefully and make an informed decision about what you desire from your investments.
If you're not looking to secure your wealth, it may be worth considering purchasing shares in mining equipment or companies that extract gold. If you need cash flow from an investment, purchasing gold stocks is a good choice.
You can also put your money in exchange traded funds (ETFs). These funds allow you to be exposed to the price and value of gold by holding gold related securities. These ETFs usually include stocks of precious metals refiners or gold miners.
How much of your portfolio should be in precious metals?
To answer this question we need to first define precious metals. Precious metals refer to elements with a very high value relative other commodities. They are therefore very attractive for investment and trading. Gold is today the most popular precious metal.
But, there are other types of precious metals available, including platinum and silver. The price volatility of gold can be unpredictable, but it is generally stable during periods of economic turmoil. It is not affected by inflation or deflation.
As a general rule, the prices for all precious metals tend to increase with the overall market. They do not always move in the same direction. When the economy is in trouble, for example, gold prices tend to rise while other precious metals fall. This is because investors expect lower interest rates, making bonds less attractive investments.
When the economy is healthy, however, the opposite effect occurs. Investors are more inclined to invest in safe assets, such as Treasury Bonds, and they will not demand precious metals. They become less expensive and have a lower value because they are limited.
You must therefore diversify your investments in precious metals to reap the maximum profits. Furthermore, because the price of precious Metals fluctuates, it is best not to focus on just one type of precious Metals.
How much gold do you need in your portfolio?
The amount of money you need to make depends on how much capital you are looking for. For a small start, $5k to $10k is a good range. As your business grows, you might consider renting out office space or desks. So you don't have all the hassle of paying rent. It's only one monthly payment.
It is also important to decide what kind of business you want to run. In my case, we charge clients between $1000-2000/month, depending on what they order. Consider how much you expect to make from each client, if you decide to do this kinda thing.
If you are doing freelance work, you probably won't have a monthly salary like I do because the project pays freelancers. You may get paid just once every 6 months.
So you need to decide what kind of income you want to generate before you know how much gold you will need.
I would recommend that you start with $1k-2k worth of gold and then increase your wealth.
Who is the owner of the gold in a gold IRA
An individual who has gold is considered to be a “form of money” by the IRS and subject to taxation.
To take advantage of this tax-free status, you must own at least $10,000 worth of gold and have been storing it for at least five years.
Although gold can help to prevent inflation and price volatility, it's not sensible to have it if it's not going to be used.
If you plan to eventually sell the gold, you'll need a report on its value. This could impact the amount of capital gains taxes your owe if you cash in your investments.
It is a good idea to consult an accountant or financial planner to learn more about your options.
What Does Gold Do as an Investment Option?
The supply and the demand for gold determine how much gold is worth. Interest rates can also affect the gold price.
Gold prices are volatile due to their limited supply. Additionally, physical gold can be volatile because it must be stored somewhere.
How is gold taxed within a Roth IRA
A tax assessment for an investment account will be based on the current market value, and not what you paid initially. If you invest $1,000 in mutual funds or stocks and then later sell them, all gains are subjected to taxes.
If you place the money in a traditional IRA, 401(k), or other retirement plan, there is no tax when you take it out. You pay taxes only on earnings from dividends and capital gains — which apply only to investments held longer than one year.
The rules that govern these accounts differ from one state to the next. For example, in Maryland, you must take withdrawals within 60 days after reaching age 59 1/2 . Massachusetts allows you to delay withdrawals until April 1. New York is open until 70 1/2. To avoid any penalties, plan your retirement savings and take your distributions as early as possible.
What are the pros and disadvantages of a gold IRA
An Individual Retirement Account is a more beneficial option than regular savings accounts. You don't pay taxes on any interest earned. This makes an IRA great for people who want to save money but don't want to pay tax on the interest they earn. However, there are also disadvantages to this type of investment.
For example, if you withdraw too much from your IRA once, you could lose all your accumulated funds. Also, the IRS may not allow you to make withdrawals from your IRA until you're 59 1/2 years old. If you do withdraw funds, you'll need to pay a penalty.
The downside is that managing your IRA requires fees. Many banks charge between 0.5%-2.0% per year. Other providers may charge monthly management fees, ranging between $10 and $50.
If you prefer your money to be kept out of a bank, then you will need insurance. Insurance companies will usually require that you have at least $500,000. You may be required by some insurers to purchase insurance that covers losses as high as $500,000.
If you are considering a Gold IRA, you need to first decide how much of it you would like to use. Some providers limit the amount of gold that you are allowed to own. Others let you choose your weight.
You'll also need to decide whether to buy physical gold or futures contracts. Futures contracts for gold are less expensive than physical gold. However, futures contracts give you flexibility when buying gold. Futures contracts allow you to create a contract with a specified expiration date.
You'll also need to decide what kind of insurance coverage you want. The standard policy doesn't include theft protection or loss due to fire, flood, or earthquake. It does include coverage for damage due to natural disasters. You may consider adding additional coverage if you live in an area at high risk.
Additional to your insurance, you will need to consider how much it costs to store your gold. Storage costs are not covered by insurance. In addition, most banks charge around $25-$40 per month for safekeeping.
To open a IRA in gold, you will need to first speak with a qualified custodian. A custodian helps you keep track of your investments, and ensures compliance with federal regulations. Custodians aren't allowed to sell your assets. Instead, they must maintain them for as long a time as you request.
After you have decided on the type of IRA that best suits you, you will need to complete paperwork detailing your goals. You should also include information about your desired investments, such as stocks or bonds, mutual funds, real estate, and mutual funds. Your monthly investment goal should be stated.
Once you have completed the forms, you will need to mail them to your provider with a check and a small deposit. The company will then review your application and mail you a letter of confirmation.
If you are thinking of opening a gold IRA for retirement, a financial professional is a great idea. Financial planners have extensive knowledge in investing and can help determine the best type of IRA to suit your needs. You can also reduce your insurance costs by working with them to find lower-cost alternatives.
Statistics
- If you take distributions before hitting 59.5, you'll owe a 10% penalty on the amount withdrawn. (lendedu.com)
- You can only purchase gold bars at least 99.5% purity. (forbes.com)
- Instead, the economy improved, stocks rebounded, and gold plunged, losing 28 percent of its value in 2013. (aarp.org)
- Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)
- This is a 15% margin that has shown no stable direction of growth but fluctuates seemingly at random. (smartasset.com)
External Links
investopedia.com
- Are You a Good Candidate for a Gold IRA
- What are the Options Types, Spreads, Example, and Risk Metrics
forbes.com
- Gold IRA – Add Sparkle to Your Retirement Nest Egg
- Understanding China's Evergrande Crisis – Forbes Advisor
cftc.gov
law.cornell.edu
- 7 U.S. Code SS7 – Designation board of trade as contract marketplaces
- 26 U.S. Code SS 408 – Individual retirement accounts
How To
Three Ways to Invest In Gold For Retirement
It's crucial to understand where gold fits in your retirement strategy. There are several options to invest in precious metals if your employer has a 401k. You might also be interested to invest in gold outside the workplace. For example, if you own an IRA (Individual Retirement Account), you could open a custodial account at a brokerage firm such as Fidelity Investments. If you don't have any precious metals yet, you might want to buy them from a reputable dealer.
These are the rules for gold investing:
- Buy Gold With Your Cash – Do not use credit cards to purchase gold. Instead, deposit cash into your accounts. This will protect your against inflation and increase your purchasing power.
- Own Physical Gold Coins – You should buy physical gold coins rather than just owning a paper certificate. The reason for this is that physical gold coins are much more easily sold than certificates. You don't have to store physical gold coins.
- Diversify Your Portfolio – Never put all of your eggs in one basket. This is how you spread your wealth. You can invest in different assets. This helps to reduce risk and provides more flexibility when markets are volatile.
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By: Ansel Lindner
Title: China Capital Flight and Bitcoin: A New Source of Demand
Sourced From: bitcoinmagazine.com/markets/china-emerging-as-surprising-source-of-bitcoin-demand
Published Date: Tue, 30 Jan 2024 19:02:41 GMT
