A prime brokerage exec shares 4 reasons why 'bitcoin is better at being gold than gold' as wealth-erosion fears mount — and explains the crucial role emerging markets play in driving demand

Stephen Kelso, head of markets at ITI CapitalStephen Kelso

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The recent rise of bitcoin and cryptocurrency investing is often associated with millennials and generation Z.

That's a misconception, according to Stephen Kelso, who is head of markets at London-based prime brokerage firm, ITI Capital.

"Many of the clients that we have seen have been boomers, and, senior advanced patriarchs and matriarchs of family wealth built up over generations, who now, at this stage, appreciate that actually, that money in the bank is now at much bigger jeopardy of erosion than it was even after the global financial crisis," Kelso said.

The unconventional monetary policy response to the global financial crisis resulted in a significant expansion of central bank balance sheets as they leveraged quantitative easing to stimulate the economy. This resulted in low interest rates, which punished savers, Kelso said.

Now, the same tool is being used in response to the pandemic. Central bank balance sheets are ballooning and interest rates are at all time lows.

The Federal Reserve's balance sheet currently sits at $7.7 trillion. Prior to the financial crisis of 2008/09 it stood at around $1 trillion. The benchmark US interest rate is at 0.25%.

FRED graph of Federal Reserve balance sheetFRED economic data, St Louis Federal Reserve

Investors feel they need to take action, Kelso said.

ITI Capital has seen an increase in interest from institutional and professionals in their digital asset business, which provides custodial, lending and trading services for cryptocurrencies, alongside traditional equity financing and prime brokerage services.

Emerging markets and bitcoin

The firm particularly specializes in providing exposure to emerging markets; that's where Kelso first witnessed the real potential of bitcoin.

Bitcoin was an extension of the emerging-market investment phenomenon, Kelso said.

For individuals in emerging markets, cryptocurrencies democratized financial services, Kelso said.  For multinational companies, it provided more flexible financing opportunities in today's geopolitical world, he added.

Wealth preservation has been one of the biggest financial challenges in emerging markets since the Second World War, Kelso said.

One recent example is when Turkish President Recep Erdoğan replaced the head of his country's central bank for the third time in two years on March 22. This resulted in a 15% drop in the value of the Turkish lira against the dollar to record lows. CoinDesk reported an uptick in young people in Turkey buying cryptocurrencies following the news.

Bitcoin and cryptocurrencies have offered a way for investors to gain access to a store of value that isn't controlled by a single entity.

"Now with the advent of the great coronavirus recession and this debasement of fiat currencies accelerating, those conditions have now come to developed markets," Kelso said. "That's why I think the emerging market background is so very relevant to understanding what's going on and where digital assets are likely to run to."

Bitcoin, right now, is a volatile store of value, Kelso said. However, for those in emerging markets who, for one reason or another, have less trust in the existing framework, it can be a better store of value than gold, he added.

Bitcoin as digital gold

"Bitcoin is better at being gold than gold," Kelso said. He backs this up with four reasons:

1) Scarcity

One of the reasons bitcoin is considered a good store of value is its scarcity. It's absolutely constrained to a supply of 21 million coins. There are no opportunities to find more bitcoin, the same way there currently is with mining for gold.

"I think [scarcity] is the principal dynamic that is going to take this thing so much higher than it is at the minute," Kelso said.

2) Lower carry cost

As bitcoin is digital, owning it is fairly inexpensive relative to gold. Simply keeping gold in a vault means investors are exposed to interest rates, as well as the cost of storing and insuring it, known as "the cost of carry". 

3) Direct access

"I can hold my own private keys, I can put them in my own safe, or I can pay a custodian," Kelso said. 

4) Trust in the system

Third parties are often used to manage the storage and purchases of gold. Therefore, investors often need to trust the administrator, Kelso said.

"To us, here in the UK and in developed markets, we take that for granted, but of course, in many emerging markets and many frontier markets, that's a big deal," Kelso said.

Why now?

There are two reasons why bitcoin is now seriously being looked at as alternative to gold relative to previous years, Kelso said.

The first is the rate of debasement from fiat currencies since the expansion of the G4 central bank balance sheets. This means more investors are losing trust in the system and are looking for stores of value that aren't controlled by single entities.

The second is that big financial institutions, wealth managers and asset managers now want the most responsible way to give access to bitcoin and digital assets. 

Bitcoin was the first megatrend where retail investors led institutional investors, Kelso said, and now these firms are looking to catch up.

Compensation drives behavior, Kelso said.

"I see so many things from Main Street, from Wall Street, from the central policymakers, and of course the global demand that are all supporting bitcoin," Kelso said.

Kelso gains insight from the firms offering institutional investors the ability to block trade BTCE, an exchange-traded cryptocurrency that is 100% backed by bitcoin, and achieve best execution through a trading business that provides access to the underlying cryptocurrency market.

"I'm loath to give guidance, suffice it to say, I am very bullish on where bitcoin is going," Kelso said.

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