It’s hard to argue that the case for bitcoin as a store of value that, like gold, provides a hedge against inflation has been badly battered in recent months.
Having plummeted as much as 50% in the past three months, the price of bitcoin has led a broader cryptocurrency sell-off as the Federal Reserve began making it clear that a series of rate hikes were coming this year as it targeted inflation in the wake of 40-year highs.
As it’s the acceptance of the thesis that bitcoin is a store of value — a true digital gold — by the institutional mainstream that pushed large investors into crypto in the first place, it’s not hard to argue that institutional pullback has been behind the dropping price of crypto.
What’s going to happen in a real crisis like the one unrolling in the Ukraine since Thursday (Feb. 24) is still unclear.
Digital Gold?
Arguing that the case for bitcoin as a digital gold has been unraveling, Bloomberg in late January pointed to its strong correlation with the stock market.
“No one is buying gold to get rich. People buy gold to stay rich,” Euro Pacific Capital CEO Peter Schiff, a longtime gold supporter and fierce bitcoin critic, told Bloomberg.
“If your premise is that you want to be buying something as a hedge against distress, boring is great,” Interactive Brokers’ Chief Strategist Steve Sosnick added.
Given its extraordinary volatility, no one would reasonably call bitcoin boring.
There’s another way to look at it, though. Rather than institutional investors turning to bitcoin to buy and hold in their corporate treasuries, it’s the short-term traders have been turning away from bitcoin — and other risky assets — as economic uncertainty roils the broader financial markets.
“It’s the short-term holders, it’s the institutional traders, they’re the ones who end up — if they’re selling or are forced sellers — they’re selling at a loss,” Anthony Polmpliano, a well-known bitcoin bull and head of Pomp Investments, told CNBC Friday (Feb. 25). “I think that a lot of that’s kind of behind us.”
And indeed, banks like Goldman Sachs, Wells Fargo and J.P. Morgan had been saying in early February that it is a good time to invest in bitcoin.
Read more: Banks, Asset Managers, Corporates Climb Back on the Bitcoin Bandwagon
What’s It Good For?
When it comes to gold, the original store of value has also long been a go-to in times of crisis. That has certainly been the case this month, as gold jumped more than 5% as the Russian invasion of Ukraine became more and more likely.
The outlook has started to become a little cloudier since Thursday, as bitcoin at first slowly and then Friday morning very quickly reversed a steep price drop of 10% that coincided with the beginning of the Russian invasion of Ukraine.
But that is arguably one of the original purposes of the creation of bitcoin. Along with a way to make payments that bypass the traditional financial system, cryptocurrency provides a way to hold, use and transport assets under the radar of government authorities that has been a traditional role of gold during war and unrest.
That’s certainly behind bitcoin’s growing acceptance in Venezuela as its economy unraveled.
Like anything involving the start of the first shooting war in Europe since the Balkan conflicts of the 1990s — and especially one that involves a major power like Russia and the near certainty of greater tensions with NATO countries — uncertainty has skyrocketed.
However, it can be argued that the growing sense that the United States and European Union sanctions on Russia will not be as severe and economically damaging to either side as previously suspected has dampened concerns about the scale of sanctions’ impact on the economy.
For one thing, both Germany and the U.S. Friday morning said that shutting Russia out of the SWIFT financial transaction messaging service is undesirable and unlikely to happen soon.
See more: Why Removing Russia From SWIFT Won’t Be Simple
Nonetheless, the thesis that bitcoin is a crisis asset will be tested as harshly in the next few months as its utility as a store of value has been in the past few months.
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