The gold is the refuge value par excellenceand in recent years some voices have been heard arguing that bitcoin could be a deposit with a similar level of security. It was thought that, in this way, bitcoin could diversify portfolios and act as a shield against inflation. However, since its introduction into circulation it has been observed that cryptocurrencies are not immune to political crises. Despite the fact that some analysts defend that they can act as a safe haven in the face of instability, events show otherwise. When chaos reigns in the stock markets and the financial world, cryptocurrencies tend to fluctuate in a similar way to other risk securities. The outbreak of war between Russia and Ukraine has not been an exception and has triggered strong crashes dyeing the cryptocurrency market red.
Since 2020, both bitcoin and the rest of cryptocurrencies are behaving as a risk asset. The International Monetary Fund (IMF) already warned that currencies such as bitcoin or ethereum already are closely interconnected with the bagsespecially with the S&P 500 stock index. Being highly correlated with these stocks cause a domino effect when one of the parties suffers falls. This is one of the reasons why it is difficult to draw similarities between cryptocurrencies and gold, which historically tends to rise whenever a war breaks out. While between 2017 and 2019 the returns of bitcoin did not seem to follow a similar direction to that of the S&P 500 shares, they seemed to change their behavior and move with the index when the pandemic broke out. This could be verified by correlation coefficient that shot up to 0.36 the years 2020 and 2021.
As has been observed, Vladimir Putin’s offensive has caused dramatic Falls in the stock markets also dragging cryptocurrencies. Some tokens have fallen to historical levels, as has been the case with Dogecoin. Bitcoin, meanwhile, has lost a not inconsiderable 10%, although it has been corrected and has reached USD 39,000 today, quelling investor panic.
The director of the investment platform AJ Bell, Russ Mould, pointed out that this coin”has not shown any signs of being a store of value during the current crisis“.
For its part, gold has behaved more predictably, rising more than 2%, after the demand of investors who approach the heat of this classic precious metal as soon as a conflict breaks out. It is revealed once again the growing gap between bitcoin and the coveted yellow metal. While gold prices have grown 8%, Bitcoin has lost almost a third of its value.
The existing rivalry between gold and cryptocurrencies is not a recent thing. At the beginning of the health crisis and quarantines, In March 2020, the role of cryptocurrencies as a refuge value began to be questioned. It must be admitted that, until then, bitcoin had functioned as a refuge comparable to that provided by investing in the metal. This had earned it the nickname of “digital gold” and it resisted in the worst moments of the trade war between Trump’s US and China. However, as the panic broke out, digital assets began to suffer similar declines to other risk assets.
Graph in which it is observed how gold has remained stable in the last three years against the most volatile variations of Bitcoin. Source: Cryptonews
Curiously, after the end of sanitary restrictions, bitcoin appreciated again and became an excellent tool to diversify portfolios in order to avoid inflation in the US at that time. Despite this, Ramiro Martinez-Pardo, CEO of HeyTrade, explained that cryptos have sometimes been very exposed to news about positive or negative perspectives, and that they have behaved like stocks with a very high beta, that is, with a price highly correlated with the rest of the market.
Recently, heThe imminent rate hike by the US Federal Reserve (Fed) has caused some concern in case this could negatively impact growing technology stocks listed on the Nasdaq. But it does not seem very clear if the cryptos would count as one more with all its peculiarities, despite its high correlation with this niche.
The war in Ukraine, therefore, has only confirmed that bitcoin is still quite vulnerable both to the Fed’s hikes and to worrying geopolitical tensions.
One point to keep in mind against crypto is that in a war scenario in which there could be power outages, this could affect mining operations of cryptocurrencies and tokens. Rising electricity prices would also make mining more expensive. Despite this, it must be stressed that one of its advantages is that Should certain banks close or local currencies lose value, citizens will continue to have access to capital through crypto. A strong point is precisely its ability to provide economic protection against censorship and authoritarianism. Cryptocurrencies have the potential to be an ally for those who want to keep their money out of the power of certain governments.
Cryptocurrency prices are likely to remain volatile in the coming days and will be influenced by the conflict in Russia and Ukraine. The current panic in the markets makes it difficult for the currency to become a financial alternative in times of uncertainty in which there is also a devaluation of fiat currencies due to inflation. The fact that bitcoin is behaving like a highly volatile asset is scaring away investors seeking safety in the face of the uncertainty generated by the Russian invasion of Ukraine.
It is difficult to know if in a few years and in another context there would be the possibility that bitcoin would beat gold as a refuge value in crisis situations. If compared to the precious metal, it still lacks maturity. To this day, then, its financial security seems quite limited in comparison.
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