In brief

  • The prospect of regulatory scrutiny and more volatility is diminishing Bitcoin's claim to rival gold as a portfolio hedge.
  • Analysts said that recent plunges of 30% had been a wake-up call for investors.

Savage one-day price swings of over 30%, and the prospect of more critical regulatory scrutiny, mean the shine is coming off Bitcoin’s claims to rival gold as a store of value.

Bitcoin’s potential to be a better portfolio hedge than gold has been bolstered by its performance in the past year. It’s outshone other assets throughout 2020 and much of this year. But events of the past week—which have included Elon Musk criticizing Bitcoin’s energy expenditure and China reiterating its tough stance on crypto—saw Bitcoin fall 40% from its record high of over $63,000 and have unnerved all but the most ardent of fans.  

Earlier this week, JP Morgan Chase reported that large institutional investors were dumping Bitcoin in favor of gold. They based their findings on open-interest data in Bitcoin futures contracts from the Chicago Mercantile Exchange. However, the bank held firm to its forecast that Bitcoin was on track to hit $140,000 in the long term.

“This week’s crypto plunge and rebound was a wake-up call,” Edward Moya, a senior market analyst with trading platform Oanda Corp, told Bloomberg. Many others echoed his sentiments.

“It comes as no surprise that the place of Bitcoin in any investment portfolio remains highly contested, precisely because of its erratic price movements,” Societe Generale analysts Alain Bokobza and Arthur Van Slooten wrote in a note on Thursday. 

Bitcoin as digital gold

Proponents of the digital gold theory have argued that Bitcoin shares key characteristics with gold. Most often they point to its capped supply. But Bitcoin’s plunge this week means its 60-day realized volatility is now much higher than gold and rising. Wednesday proved a case in point: Bitcoin plunged 31% before recovering and ending the day near the price it began. 

Meanwhile, gold has seen weekly gains for three weeks in a row now, and analysts say it has even benefited from the crashing crypto market. 

However, since the start of 2021, spot prices on gold have fallen over 1%, while Bitcoin is still up around 38% within a similar period—despite its recent falls.

In 2020, governments have injected record liquidity into economies in a bid to limit the economic damage wrought by the COVID pandemic. The Societe Generale analysts said that investors concerned by fiscal stimulus considered both gold and Bitcoin as a hedge. “Investors perceive both as offering protection (or at least alternatives) against official central bank money,” said Bokobza and Van Slooten.

The analysts argued that one of the biggest threats to Bitcoin was regulatory curbs. On Thursday, the U.S. Treasury Department announced new measures to regulate the market, with plans for businesses to report cryptocurrency transfers of more than $10,000 to the IRS. 

Meanwhile, commentators argue that cryptocurrency is still in its infancy as an asset class, and it’s too early to make a comparison. Oil, they say, also had a difficult time establishing its value after it was discovered.

But with Bitcoin’s energy consumption one of the triggers for the latest correction, that may be a comparison best avoided.