January 30th, 2019
In its latest report “Investment Update: Cryptocurrencies are not a safe-haven,” World Gold Council states cryptocurrencies may have a role to play in financial market but they aren’t a viable substitute to gold as a safe haven due to the price crash in late 2018 and Bitcoin futures market’s declining volume in the fourth quarter.
Bitcoin & Cryptos No Substitute for Gold
Bitcoin and cryptocurrencies to act as a safe-haven during the times of currency, a financial, or economic crisis is a running narrative for a long time now. However, the World Gold Council has discharged it completely. In its recent report, it shares how Bitcoin failed to demonstrate qualities associated with being a safe-haven.
“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.”
In its research, World Gold Council notes that though comparisons have been made, it says there are several reasons that state, “cryptocurrencies are no substitute for gold.” The primary point it puts forward is gold being less volatile and having a more established market than cryptos.
“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.”
Focusing on the events of late 2018 when Bitcoin and various cryptocurrencies fell down to their yearly lows, the report says:
“As 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, Bitcoin Futures, Nasdaq, & Gold
According to the World Gold Council, cryptocurrency price crash in late 2018 resembled “a technology stock as it fell 55% during the quarter, while the Nasdaq fell 19%.”
It further states that Bitcoin and Nasdaq were “heavily correlated (0.69)” which hasn’t been apparent before the market pullback. During this period, on the other hand, gold rallied 9.4 percent and was “strongly inversely correlated with the Nasdaq at (-0.73).”
Moving onto the Bitcoin future market, in the fourth quarter when the “true market stress” occurred since the financial crisis, it fell sharply while the volumes in gold and global markets rose.
“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.”
“While cryptocurrencies may have a role to play in the financial markets, their behaviour in an environment of market uncertainty underscored that they are not a viable substitute for gold as a safe-haven.”