Don't confuse Bitcoin for gold (via Pixabay).
Bitcoin,  Opinion

Crypto’s Gold Replacement Theology remains a myth—for now

Data show Bitcoin isn’t the gold-replacing safe haven touters say it is

For the past several days, Bitcoin/self-promoters have been touting the cryptocurrency as a safe haven from uncertainty in the markets. In other words, they are letting fantasy get in the way of reality.

It’s easy to ascribe recent moves in Bitcoin to shaky trade talks. On August 1, President Trump tweeted that the U.S. would lob 10% more in tariffs on another $300 billion in Chinese goods starting September 1 in addition to the 25% that was thrown on $250 billion earlier.

The S&P 500 closed down nearly 1% that day and peeled off about 100 points within a week. Meanwhile, Bitcoin rallied 3% that day and added about $1,800 in value seven days later. Likewise, when it seemed trade tensions were easing on August 13, the S&P 500 rallied 1.8% by midday while Bitcoin pulled back 2.6%.

“See?” say the touters to the doubters. “An inverse correlation! The kids are all using Bitcoin as safety the way the oldsters used to use gold!”

[Editor’s note: Nick Whittemore’s roundup on Twitter gives some insight into the argument that money fled to Bitcoin in the wake U.S.-China trade tensions (hat tip to Messari)].

It’s a narrative that sounds especially reasonable since gold also moved 3% higher on August 1 and dropped 3% when the Trump Administration announced it was holding off on some additional tariffs until December.

But data say something completely different. Yes, Bitcoin has soared about 178% since April Fools Day and gold is up 17%. But the two aren’t correlated. Nor are Bitcoin’s price moves related to U.S. stocks.

The 180-day correlation coefficient of gold and Bitcoin is 0.13 as of this writing—in other words, almost zilch. Bitcoin’s correlation coefficient with the S&P 500 for the past six months is -0.06, so also nada.

Correlations of BTC to the S&P 500 and GLD (the gold ETF), via Coinmetrics.io.

Thus the Gold Replacement Theology one may see on Twitter doesn’t quite hold up to facts or mathematics. Besides, data aren’t as good for use in jewelry; a majority of chumps have yet to buy their significant others a bitcoin or two when they’re caught with an AshleyMadison.com account.

And looming over the horizon remains central bank actions and global growth—or lack thereof. If interest rates in industrialized countries continue to hover around the 0% mark, the argument that Bitcoin’s finite supply is a hedge against inflation may be faced with a giant “so what?” by the market.

In places like Denmark, we’re even seeing negative mortgage rates; banks are paying customers to take out loans. HODLers have to hope we see more situations like Venezuela, where Maduro’s catastrophic—and deadly—policies are making cryptocurrencies the only means of payments for many. And more recently, there’s Argentina, where the dreaded possible return of Christina Kirchner in any position of power brutally sliced the country’s stocks in half overnight and tanked the peso by 15%; perhaps Bitcoin will be as appealing as hard assets to overcome further devaluation.

So for now, hoping that Bitcoin will serve as the go-to asset in economic crises is a dream that’s a long way off.

Then again, the United States may well elect its own Kirchner next year, for all we know.  

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.

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