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One of Bitcoin's biggest selling points is that it's supposed to be "digital gold" — a hedge against inflation and a safe haven when other assets, like stocks, are tanking. But the cryptocurrency market volatility we've seen stemming from the war in Ukraine is hurting that argument.
The stock market has had a tumultuous few weeks as the Russia-Ukraine conflicted escalated and Russia eventually invaded Ukraine last week. The S&P 500 marked its first correction since the beginning of the pandemic, and the Dow Jones Industrial Average and Nasdaq Composite also saw price swings as investors tried to make sense of the constant stream of news. This comes after a rough start to the year for stocks in general as investors prepare for an anticipated interest rate hike.
But Bitcoin's price hasn't provided crypto holders relief. During the first two months of 2022, Bitcoin's price has seesawed between $34,000 and $45,000 per coin, a far cry from its high of $68,000 in November. On Monday, Bitcoin prices initially dropped from $39,000 to $38,000, before popping back up and trading at around $41,000 by midday. Other cryptocurrencies, like Ether, have also experienced rollercoaster-like price movements.
"The recent performance of Bitcoin and other cryptocurrencies reinforces that they are risk assets — and high-risk assets at that — and not safe haven assets," Robert Johnson, professor of finance at the Heider College of Business at Creighton University told Money via email.
No matter how strongly crypto advocates want to assert that cryptocurrencies are akin to gold as a store of value, empirical market performance simply suggests otherwise, he adds.
The 'digital gold' argument for cryptos
Many investors have turned to Bitcoin with the hopes that it will provide them returns they're not seeing from other assets, like stocks and bonds. Cryptocurrency enthusiasts argue that because crypto operates outside of the traditional financial system, it's less vulnerable to global crises and can therefore act as a safe haven asset when stocks are tanking, much like gold often does.
The argument that Bitcoin is like "digital gold" also rears its head when proponents talk about inflation. They say that Bitcoin can do an even better job than gold when it comes to keeping pace with inflation since it's more independent of the dollar and other mainstream assets. (Though inflation is at a 40-year high, with prices rising for everything from food to cars to rent — and Bitcoin is still far from its record high.)
Why Bitcoin is not a safe haven asset
The argument that cryptocurrencies are good alternatives for investors when stocks are flagging has certainly taken a few hits recently.
Bitcoin has increasingly traded in line with technology stocks over the past few years, analysts at Bespoke Investment Group wrote in a report to clients Friday. And during the March 2020 market crash — when COVID-19 hit the U.S. — cryptocurrency prices also plummeted.
Meanwhile, gold has recently been outperforming Bitcoin, and was trading at its highest levels since late 2020 on Thursday.
Plus, Bitcoin has seen an exponential increase in its market price over the last few years, which is simply not a characteristic of a safe haven asset, Johnson says.
Overall, cryptocurrency is a speculative, risky asset due to its extreme price volatility, lack of regulation and uncertain future. If you are interested in buying cryptocurrency, financial advisors tend to recommend you view it as a long-term investment and not try to time the market.