Once expected to become ‘digital gold’, Bitcoin disappoints amid Ukraine crisis
Once expected to become ‘digital gold’, Bitcoin disappoints amid Ukraine crisis.
“Bitcoin, the asset expected to be the answer to all problems, is quietly weakening and significantly weakened relative to ‘competing’ gold”…
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Figure – Photo: Reuters.
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In the past, many cryptocurrency investors believed that when political instability increased and inflation was high, BTC would become a kind of “digital gold” that would play the role of a safe haven investment channel like gold. However, as of this writing, the BTC price is yet to take off due to geopolitical uncertainty and high inflation.
On Tuesday, BTC’s price fell to a two-week low as Russian President Vladimir Putin ordered troops deployed to Ukraine’s breakaway regions of Donetsk and Luhansk after recognizing the independence of the two free republics.
Proponents of the idea of bitcoin as “digital gold” believe that the world’s largest virtual currency can become a store of value like the metal gold. They believe that if the financial markets fluctuate and risky assets like stocks fall in price, the price of bitcoin will not be “damaged” and can even rise sharply. They also believe that bitcoin is a “storm shield” from economic instability and inflation, which reduce the purchasing power of fiat money.
With US inflation at a 40-year high, many would have expected BTC to “shine” this time around. Last January, the index Consumer price (CPI) US rose 7.5%, the highest since February 1982.
But on the contrary, the BTC price is now down about half since the record price of nearly $69,000 set in November last year. This has led many analysts to question whether assigning “digital gold” status to Bitcoin is a mistake.
“BTC is still in the early stages of maturity to firmly assert its status as ‘digital gold,'” said Luno Vice President Vijay Ayyar.
BTC’s recent price drop coincided with the decline in global financial markets. The S&P 500 index of the US stock market entered a corrective market on Tuesday and continued to fall on Wednesday. BTC price is moving ever closer to the stock market as the correlation between BTC price and the S&P 500 increases over time.
Experts say that cryptocurrencies already have a closer relationship with other highly speculative assets in the market, such as tech stocks. Tech stocks have been under pressure of late amid concerns that their massive valuations will be difficult to sustain as the Federal Reserve and other central banks begin to hike interest rates and withdraw huge fiscal stimulus packages.
“The proportional ratio between cryptocurrencies and stocks has risen to high levels over the past few months, both after the macro news regarding inflation and the Russian-Ukrainian geopolitical situation,” B2C2 trader Chris Dick told CNBC. “This connection shows that BTC is viewed as a risky asset rather than a safe haven asset, as it was touted a few years ago.”
In fact, gold is outperforming bitcoin. Spot gold prices hit a nine-month high on Tuesday, reaching nearly $1,914 an ounce.
“Bitcoin, the asset that’s expected to be the answer to all problems, is being quietly and significantly weakened compared to gold’s ‘rivalry,'” said John Roque, strategist at 22V Research. “We believe bitcoin price could drop to 30,000 USDeven below that threshold, while gold prices could reach new all-time highs.”
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Bitcoin price movement over the last 5 years. Unit: USD/Bitcoin – Source: TradingView.
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Bitcoin’s drop has prompted many analysts to talk about “crypto winter” – a term used to refer to an ongoing bear market in virtual currencies. The last time there was a “virtual currency winter” was in late 2017 and early 2018, when Bitcoin’s price fell 80% from its all-time high of nearly 20,000. USD.
“The increasing acceptance of cryptocurrencies by investors from the traditional investment market is a key driver of the positive relationship between Bitcoin and stocks,” said Dick. However, he added: “But this relationship can be broken at any time, considering that every market has different fundamental factors.”
To more effectively compete with gold as a store of value, Bitcoin needs to find broader adoption, Ayyar said. “The fundamental elements of Bitcoin have always helped support the price of this virtual currency. It is a limited supply coin and is not governed by any state.”
“However, bitcoin needs to go through a monetization process in order to be held by a large enough number of market participants, such as individual investors buying more bitcoin, large institutions increasing their holdings, holding bitcoin, and there are more countries holding bitcoin like El Salvador,” said Mr. Ayyar.
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Once expected to become ‘digital gold’, Bitcoin disappoints amid Ukraine crisis
Once expected to become ‘digital gold’, Bitcoin disappoints amid Ukraine crisis.
“Bitcoin, the asset expected to be the answer to all problems, is quietly weakening and significantly weakened relative to ‘competing’ gold”…
|
Figure – Photo: Reuters.
|
In the past, many cryptocurrency investors believed that when political instability increased and inflation was high, BTC would become a kind of “digital gold” that would play the role of a safe haven investment channel like gold. However, as of this writing, the BTC price is yet to take off due to geopolitical uncertainty and high inflation.
On Tuesday, BTC’s price fell to a two-week low as Russian President Vladimir Putin ordered troops deployed to Ukraine’s breakaway regions of Donetsk and Luhansk after recognizing the independence of the two free republics.
Proponents of the idea of bitcoin as “digital gold” believe that the world’s largest virtual currency can become a store of value like the metal gold. They believe that if the financial markets fluctuate and risky assets like stocks fall in price, the price of bitcoin will not be “damaged” and can even rise sharply. They also believe that bitcoin is a “storm shield” from economic instability and inflation, which reduce the purchasing power of fiat money.
With US inflation at a 40-year high, many would have expected BTC to “shine” this time around. Last January, the index Consumer price (CPI) US rose 7.5%, the highest since February 1982.
But on the contrary, the BTC price is now down about half since the record price of nearly $69,000 set in November last year. This has led many analysts to question whether assigning “digital gold” status to Bitcoin is a mistake.
“BTC is still in the early stages of maturity to firmly assert its status as ‘digital gold,'” said Luno Vice President Vijay Ayyar.
BTC’s recent price drop coincided with the decline in global financial markets. The S&P 500 index of the US stock market entered a corrective market on Tuesday and continued to fall on Wednesday. BTC price is moving ever closer to the stock market as the correlation between BTC price and the S&P 500 increases over time.
Experts say that cryptocurrencies already have a closer relationship with other highly speculative assets in the market, such as tech stocks. Tech stocks have been under pressure of late amid concerns that their massive valuations will be difficult to sustain as the Federal Reserve and other central banks begin to hike interest rates and withdraw huge fiscal stimulus packages.
“The proportional ratio between cryptocurrencies and stocks has risen to high levels over the past few months, both after the macro news regarding inflation and the Russian-Ukrainian geopolitical situation,” B2C2 trader Chris Dick told CNBC. “This connection shows that BTC is viewed as a risky asset rather than a safe haven asset, as it was touted a few years ago.”
In fact, gold is outperforming bitcoin. Spot gold prices hit a nine-month high on Tuesday, reaching nearly $1,914 an ounce.
“Bitcoin, the asset that’s expected to be the answer to all problems, is being quietly and significantly weakened compared to gold’s ‘rivalry,'” said John Roque, strategist at 22V Research. “We believe bitcoin price could drop to 30,000 USDeven below that threshold, while gold prices could reach new all-time highs.”
|
Bitcoin price movement over the last 5 years. Unit: USD/Bitcoin – Source: TradingView.
|
Bitcoin’s drop has prompted many analysts to talk about “crypto winter” – a term used to refer to an ongoing bear market in virtual currencies. The last time there was a “virtual currency winter” was in late 2017 and early 2018, when Bitcoin’s price fell 80% from its all-time high of nearly 20,000. USD.
“The increasing acceptance of cryptocurrencies by investors from the traditional investment market is a key driver of the positive relationship between Bitcoin and stocks,” said Dick. However, he added: “But this relationship can be broken at any time, considering that every market has different fundamental factors.”
To more effectively compete with gold as a store of value, Bitcoin needs to find broader adoption, Ayyar said. “The fundamental elements of Bitcoin have always helped support the price of this virtual currency. It is a limited supply coin and is not governed by any state.”
“However, bitcoin needs to go through a monetization process in order to be held by a large enough number of market participants, such as individual investors buying more bitcoin, large institutions increasing their holdings, holding bitcoin, and there are more countries holding bitcoin like El Salvador,” said Mr. Ayyar.
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