In Bitcoin’s second recent major test as a safe haven asset in macro-economic distress, the patriarchal cryptocurrency failed—miserably. The latest implosion under $4000/BTC late Thursday night comes at a point where Bitcoin could have solidified its claim as a true ‘store of value’. Unfortunately, it did not.
On Thursday, Bitcoin suffered one of its worst single-day drops ever, falling roughly 48%— $7,600 to $3,950—peak to trough, on the same day. All the while S&P 500 futures—reeling itself from the ravages of an unending coronavirus news cycle—fell approximately one-quarter of that amount. Gold, the world’s original safe haven, only shed roughly seven percent, showing once again why it is old reliable. Bitcoin’s complete destruction was an admission (if not tacit) that it is not ready for worthy consideration as a true fear hedge.
Further corroborating this narrative is Bitcoin’s performance versus gold since the coronavirus crisis began. From a stock market perspective, we can trace that back to the panic gap-down of broad indexes on February 24th, as the critical mass of coronavirus negativity finally sent the markets into freefall.
Since then, gold has fallen roughly 7% while Bitcoin has cratered roughly 44%—over six times that amount—even factoring in the current price rebound off the lows ($5,390 as of this writing). This omits the fact that gold is a much more liquid market and prone to less fill slippage when buying or selling. While both markets can plunge when massive buy and sell orders move through, Bitcoin can drop 15% or more in minutes making the swings impractical as a hedge. Typically, gold’s dislocations are a third to a fifth of that.
While that’s great for traders seeking extreme alpha on short term swing positions, the volatility does not lend itself well as a genuine store of value.
Bitcoin’s Previous Failed ‘Store of Value’ Attempt
If we rewind the clock back to October 2018, Thursday’s price displacement should come as little surprise. In fact, the price action mimics a similar dynamic which transpired during the last market crisis between October-December 2018.
It was then a confluence of factors ranging from earnings concerns, declining technicals, Brexit and blowup of the short volatility/long equity trade sent markets swooning. From the October 2nd peak to December 24, the S&P 500 lost almost twenty percent (19.79%) on a closing basis, barely avoiding recession territory.
What did Bitcoin do during that time? More of the same.
During the same period indicated above, the patriarchal cryptocurrency declined approximately thirty-nine percent (41.25%), over double that of the S&P 500. This was in addition to pronounced declines seen the year earlier, when Bitcoin briefly touched $20,000/BTC in December 2017.
Far from a store of value, Bitcoin provided the opposite of what a hedge should bring—outsized losses to unfortunate investors.
Although Bitcoin is frequently parroted as a store of value by its vociferous proponents, there’s little evidence that it is actually true. While every asset class has lost significant value over the past three weeks, similar to the October-December 2018 period, Bitcoin lost even more. Yet again, it exhibited the type of price action investors do not care to witness in a true crisis.
This isn’t to say that Bitcoin doesn’t have a rightfully place in most balanced portfolios. Its outsized unpredictable profile can actually serve to decrease portfolio volatility in many circumstances. However, as a true fear hedge—the kind of asset that outperforms while others crumble around it—Bitcoin is batting 0 for 2 in recent times. Worse than that, it actually tends to lose more value.
That is enough to keep us away until ‘risk on’ sentiment returns to the market—whenever that may be.