Bitcoin & Crypto Assets are not a Viable Gold Safe-Haven Substitute

Yesterday, the World Gold Council released its latest report in which it dismissed the norm of Bitcoin and cryptocurrencies being a safe-haven. Pointing out the cryptocurrencies’ worst performance in late 2018 when Bitcoin fell down to its lowest in a year at $3,150 and other top cryptocurrencies crashed 90 to 95 percent, it was also the time when the stock market went through its worst quarter.

“In Q4 2018, as global stock markets experienced their worst quarter since 2009, cryptocurrencies had a prime opportunity to demonstrate qualities associated with safe havens like gold. However, cryptocurrencies, such as Bitcoin, behaved like risky assets and fell while gold rallied.”

Though comparisons have been made between Bitcoin and Gold, the report states there are several reasons like volatility, liquidity, and others that prevent cryptos from becoming a safe haven like gold.

“Gold is less volatile and enjoys a more liquid and established market. It has a well understood role in an investment portfolio and minimal overlap with cryptocurrencies on many sources of demand and supply.”

In its previous report from January 2018, the World Gold Council had shared,

“Bitcoin’s parabolic price rise was the big story of 2017 – putting the spotlight on the cryptocurrency market. While gold’s performance was a solid 13%, it was a fraction of the 13-fold increase of Bitcoin by the end of the year. Some commentators went as far as to claim cryptocurrencies could replace gold.”

Bitcoin is Heavily Correlated with Nasdaq

The report declares that the events of late 2018 indicated, “the perceived ability of cryptocurrencies to serve as a liquid, safe-haven hedge and store of value in times of market stress, did not hold.”

Bitcoin’s price behaviour, according to the report resembled a technology stock as Bitcoin fell 55 percent during that quarter while Nasdaq saw a drop of 19 percent. This points out that, “Bitcoin and the Nasdaq were heavily correlated (0.69); a factor that had not been apparent prior to the market pullback. Over the same period, gold rallied 9.4% and was strongly inversely correlated with the Nasdaq at (-0.73).”

Moreover, during the quarter at a time when gold and global markets rose, the market value traded in the Bitcoin futures “fell sharply.”

“The support of a strong two-way market was lacking, suggesting Bitcoin – unlike gold – does not provide the liquidity needed in times of financial tension.”

In the fourth quarter, which was one of the few period when the true market stress occurred since the financial crisis, the average trading value of Bitcoin futures fell which according to the report “should lead investors to reassess their reasons for investing in cryptocurrencies.”

Last year, it had stated that “Bitcoin’s future diminishing growth rate and ultimate finite quantity are clearly attractive attributes, as is gold’s scarcity and marginal annual growth,” but cryptocurrencies are very different and aren’t a substitute for gold.

And just like last time, the council acknowledges that crypto “may have a role to play in the financial markets” but “their behaviour in an environment of market uncertainty underscored that they are not a viable substitute for gold as a safe-haven.”

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