Thesis on the use of bitcoin As an alternative to gold is questioned in times of volatility and experts explain whether cryptocurrency can actually be used as a value buffer
Cryptocurrency investors have long claimed that bitcoin is a kind of “digital gold”. The Name refers to the use of cryptocurrency as a value reserve, a role that has historically been the role of the precious metal. However, amid the conflicts between Russia and Ukraine, while bitcoin plummets, gold continues to rise, calling into question the cryptocurrency’s thesis as “digital gold.”
In the last 30 days, when tension between Russia and Ukraine began to grow, gold accumulated a high of 4.75%, while in the same period, bitcoin lost 3.25% of the value. On Thursday, 24, when the war was indeed started by Russian forces, bitcoin fell 6.6%, while gold rose 0.8%.
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For experts, however, it is still too early to say that the thesis of “digital gold” is invalid. “It is a thesis, that is, there is still a long way to go. Bitcoin is a new technology and with that there is still a lot of uncertainty about the future. As an asset, it is still in an early stage of adoption and as it becomes more used and adopted, the trend is for its volatility to decrease and people will start to see bitcoin as a reserve of value, a safe haven for their capital. This is a process that necessarily happens with any asset that has become a reserve of value”, explained the head of Digital Assets of BTG Pactual, André Portilho.
Similar opinion has Vijay Ayyar, vice president of crypto broker Luno, who stated that it is still too early for Think of bitcoin as a digital version of gold: “Bitcoin is still at the beginning of its maturation curve to be placed in the ‘digital gold’ category.
For João Paulo Mayall, co-founder of qr capital, the comparison between recent bitcoin and gold performances is misguided and these figures tell only part of the story: “Even with the recent short-term valuation, gold is a historical asset, and it would be important to analyze longer maturities. For example, gold remains 8.27% below its historic dollar high on August 10, 2020, when global inflation still did not scare as it is today and in a period where risky assets suffered from the pandemic. Looking at a longer term, that is, the maximum dollar high of 11 years ago, the troy ounce still trades negative 75 bps, even with the dollar monetary aggregate (M2) rising 131%.”
“Analyzing bitcoin in these same periods, we have a 226% appreciation in dollars since August 10, 2020 and 398,807% since the maximum gold high in 2011. Looking at these figures, we can conclude that it depends a lot on the period analyzed and this recent rise in gold may not be correlated with the [capital] flight of risk assets,” he added.
The use of bitcoin as a value buffer is a widespread thesis, but it is not part of the proposal created by Satoshi Nakamoto when he developed the cryptocurrency. Bitcoin is designed to be a means of payment and offer an alternative financial system. Its characteristics, however, made it gain this status from a possible reserve of value.
This is mainly because, like gold, bitcoin is scarce, and both have their limited supply – in the case of bitcoin, 21 million units; in the case of gold, as long as they exist in the natural reserves and already extracted. Moreover, like gold, bitcoin is not subject to political and economic decisions that could impact its supply, as with money, which can be printed solely and exclusively on the will of governments.
Despite this, it is still too early to compare bitcoin with gold for several reasons. First, gold has been circulating as an object of value for thousands of years, while cryptocurrency is only 13 years old. Then the markets have very different sizes: while the capitalization of bitcoin is around 700 billion dollars, that of gold, counting untapped reserves, is more than 12 trillion.
The difference in market value, coupled with the speculative behavior of most investors, makes cryptocurrency volatility much more pronounced, as if large investors sell (or buy) bitcoin simultaneously, the proportion relative to the total market cap will be much higher, and therefore also the price fluctuation.
“The correlation between crypto and stocks has been high in recent months in both inflation-related macro news and the Russia-Ukraine geopolitical situation,” Chris Dick, quantitative trader at B2C2, told CNBC. “This correlation shows that bitcoin is behaving as a risky asset at the moment – not the safe haven that was announced a few years ago.”
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MicroStrategy can play a key role in consolidating (or not) the thesis
For Ki Young Ju, CEO of blockchain analytics platform CryptoQuant, MicroStrategy and other large investors could play a key role in consolidating bitcoin as a value buffer or not.
“I believe that we can detect preventively the activity of selling whales through the network. My point is that the narrative of ‘digital gold’ is still valid as long as these institutions maintain their bitcoin positions,” he wrote on Twitter, reinforcing that if large investors like MicroStrategy decide to get their cryptocurrencies out of their cryptocurrencies, then the thesis of bitcoin as a reserve of value may be questioned.
The company that bought the cryptocurrency the most with its reserves, totaling more than 124,000 units of the asset, which equates to almost $4.5 billion, MicroStrategy and its CEO, Michael Saylor, are part of those who bet that bitcoin can be a safe haven for investors as an alternative to gold.
For Young Ju, there is still no given that refutes this thesis: “No significant ‘on-chain’ activity during this war crisis. Institutions that bought bitcoin via ‘on-chain’ transactions do not seem to have yet sold their positions. Institutions that run trading robots think bitcoin is like technology stocks. I’d rather stay until Michael Saylor decides to sell bitcoin,” he posted.
Bitcoin is currently trading at a 6.7% drop in the last 24 hours, reaching a cumulative total of -24.6% in 2022. Since Russia’s invasion of Ukraine was confirmed, hundreds of millions of dollars have been withdrawn from the crypto market, causing the price of almost all digital assets to plummet.
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