Last month, as stock markets around the world suffered historic losses, Bitcoin’s reputation as a ‘safe haven’ asset was put to the test – and most people have been perplexed with the results.
Over the past few years, there’s been no shortage of market narratives concerning Bitcoin. Many have been debunked while others have fluctuated with the price swings. However, the most pertinent and widely-debated narrative is whether Bitcoin has solidified its role as a store of value or as a ‘digital gold’.
As a borderless digital asset independent of government control, Bitcoin’s price should march to its own drum. Interestingly, this year, the price of the top cryptocurrency has at times synchronised with two opposing markets; gold and stocks.
In January, amid rising US-Iran tensions and heightened geopolitical uncertainty in the MENA region, Bitcoin’s price soared. Its high correlation with gold generated a plethora of column inches and increased investor attention.
Bitcoin’s reputation as a store of value peaked as it surpassed the $10k mark on 9 February to reach its highest level since October last year. During the same period – when coronavirus cases around the world were accelerating – the price of gold climbed to $1.6k, the highest level since March 2013. As coronavirus cases mounted, Bitcoin’s price correlation shifted further from the stable commodity and toward the free-falling equity index.
When the cryptocurrency market looked like it was ready to collapse in mid-March, Bitcoin suddenly sank below $4k – losing more than half of its marketcap in a single week below $4k – losing more than half of its value in a single week. This demise occurred in lockstep with the 33% collapse of the FTSE 100 and the tumble of Dow Jones, NASDAQ and S&P 500. Since its alarming 50% freefall, Bitcoin has very quickly bounced (as it always does), and at the time of writing, the benchmark crypto is hovering at $6.3k.
As markets dropped precipitously, the price of gold also fell but nowhere nearly as hard.
It’s no secret that one hallmark of Bitcoin is its volatility. As any Bitcoin investor would tell you, depending on the market, watching the BTC price move can be exhilarating or heart attack-inducing.
Many market observers have noted that Bitcoin’s innate volatility is far too high for it to ever classify as a safe haven asset. Gold, on the other hand, is substantially more stable hence why most investors will choose it over Bitcoin.
While it is up to each investor to identify which asset class they are more comfortable with, those with an appetite for risk are increasingly selecting Bitcoin due to its far higher risk-return ratio than most major traditional assets. Current figures show that although Bitcoin is down 11.89% YTD, in the past year the cryptoasset has shot up 54%. In comparison, gold inched up 5.7% YTD and up 24% in the past year, as per goldprice.org.
Bitcoin also managed to outperform the US stock market in the first quarter of 2020; the Dow suffered its worst first-quarter performance ever, losing more than 23% of its value.
Although Bitcoin has many characteristics that overlap favourably with gold, each asset occupies its own unique position in the financial ecosystem. Gold’s advantage above all other asset classes is its rich history and proven track record for insulating against stock market shocks.
Despite its undisputed reputation as the ultimate store of value, gold itself hasn’t always performed like a safe haven. During the initial shock of the 2008 financial crisis, gold plunged 30% before rebounding in the aftermath, when central bank remedial efforts loosened monetary policy and expanded the money supply. Many analysts are likening gold’s performance in that period to Bitcoin’s during the coronavirus market sell-off. As such, it is expected that Bitcoin’s price may too soar once the current pandemic begins to taper off.
Market observers are still scratching their heads trying to place Bitcoin on the spectrum between ‘safe haven’ and ‘risk asset’. While on one hand, Bitcoin is proving to be extremely sensitive to global macro events, it also appears to offer a safe harbour from these same forces.
There is now mounting evidence proving that Bitcoin and other cryptocurrencies serve a practical value for ordinary citizens in times of a crisis. In countries such as Venezuela and Argentina, where political tensions have led to inflation and poor economic conditions, the adoption of Bitcoin continues to increase at the same pace as economic uncertainty.
Currently in Italy, the coronavirus pandemic appears to be the driving force binding traditional banking and the cryptocurrency sector. One of the leading banks, Banca Sella, has rolled out a crypto trading service as cryptocurrencies have emerged as the most secure way to transfer money in the midst of the crisis.
Owing to its fast transaction speed, 24/7 trading and ability to facilitate cross-border transactions, we expect Bitcoin’s role in the wider financial ecosystem to grow as the world moves toward an increasingly digital future. In the meantime, as we enter Q2, both Bitcoin and gold stand to greatly benefit from the massive fiscal and monetary stimulus unleashed by central banks to combat the economic effects of the coronavirus crisis.