The last quarter of 2018 was the worst quarter for the global stock markets since 2009. However, the nightmarish period for stocks offered a great opportunity for cryptocurrencies to showcase their safe haven qualities similar to gold. But, unlike gold that was able to rally, virtual currencies like bitcoin didn’t perform as well, and fell as they proved to be risky assets.
Although a lot of comparisons have been said between cryptocurrencies and gold, there is a number of reasons that suggest that cryptocurrencies cannot ably substitute for gold. For one, gold is not as volatile. The precious metal boasts of an established and more liquid market. Its role in a portfolio is well-understood. It only minimally overlaps with virtual currencies in a lot of supply and demand sources.
As shown by the events in the 4th quarter of 2018, the cryptocurrencies’ alleged liquidity and ability to act as a safe haven hedge during times of uncertainty in the markets, was tested. Sadly, it did not live up to expectations.
During the fateful quarter, the price behavior of bitcoin is reminiscent of a technology stock. As NASDAQ went down by 19%, technology stock dropped by as much as 55%. Bitcoin performed closer to the latter than gold.
Bitcoin vs. Gold and NASDAQ
NASDAQ and bitcoin were heavily interrelated (0.69). Before the market pullback, this factor hadn’t been apparent. During the same time period, gold made a rally, gaining 9.4%. It showed strong inverse correlation with NASDAQ (0.73).
Lastly, the bitcoin futures value traded sharply fell during the quarter. It happened at a time when gold and global market volumes went up. There was lack of support from a strong 2-way market. This tends to show that unlike gold, bitcoin doesn’t offer the required liquidity to weather periods of financial stress.
Market Value Traded in Bitcoin Futures Market
The last quarter provided only 1 data point for proper bitcoin analysis. However, it was quite a crucial one. Since the last great financial crisis, it was among the few time frames when a true market stress happened. This should give investors a reason to assess their purposes for making significant cryptocurrency investments.
It is a given that cryptocurrencies may play a marked role in the financial markets. However, the behavior they show in environments plagued by market uncertainty only tend to underscore the fact that they are not viable as a gold substitute in terms of providing a safe haven.
Distinguishing Gold from Bitcoin
One of the biggest stories of 2017 was bitcoin’s unprecedented price hike. It put the cryptocurrency market in the limelight. Although the performance of gold remained solid at 13%, it accounted only for a fraction of bitcoin’s 13-fold increase towards the yearend. Some experts even went as far as commenting that cryptocurrencies can replace gold.
While virtual currencies may establish themselves as a part of the overall financial system, it is still far from being comparable to gold. After all, gold boasts of the following:
• More liquid market
• Less volatility
• A role that is well-understood in investment portfolios
• Trading in a well-entrenched regulatory framework
• Little overlap with virtual currencies as far as many demand and supply sources are concerned.
These traits support the role gold plays as a conventional financial asset that is still relevant even in the digital world today.