STORE OF VALUE: BITCOIN VS GOLD
Same, same, but different?
Bitcoin (BTC) and most other cryptocurrencies are meant to act as stores of values, the modern age equivalent of commodities like gold or silver. Naturally cryptocurrencies have some advantages over the traditional ones like lower transaction costs and better transportability, but also disadvantages like no alternative utilities. One of the biggest concerns with cryptocurrencies like Bitcoin as a store of value is the high level of volatility, historical and likely going forward. Investors seeking investments as stores of value tend to have a strong preference for stability. The chart below shows the performance of Bitcoin versus Gold from 2013 to 2017, which highlights that Bitcoin has not been a particular stable investment.
Source: CoinMarketCap, Stooq.com, CQR
We can show the same chart in logarithmic scale, which allows a better observation of the trends. We can see Bitcoin’s first bull market in 2013, then a bear market until 2015, and then the start of the current bull market. As a comparison Gold has been effectively flat over this period, which comes much closer to the definition of a store of value. The volatility of Bitcoin has been significantly higher than that of gold or other asset classes (please see our research note Cryptocurrency Volatility — Friend or Foe?).
Source: CoinMarketCap, Stooq.com, CQR
However, we can also analyse the long-term performance of gold from 1969 to 2017, which highlights some similarities to Bitcoin, and observe two significant bull and bear markets. The first bull market took place in the 1970s, driven by the high levels of inflation caused by the oil crisis. Investors were desperate for assets that protected their capital against inflation and effectively started a bull market by buying significant amounts of gold. Once inflation was reduced by the US central bank, the gold price collapsed. The second bull market started in the 2000s, likely a result of the broader commodity boom created by the rise of China.
Source: Stooq.com, CQR
We can contrast the current bull market in Bitcoin to the two of gold, where some similarities and some differences emerge. The magnitude of the gold bull market in the 1970s is comparable to the current one in Bitcoin, but the speed is quite different. Bitcoin appreciated by a larger amount in less than one year while it took gold several years to achieve the same. Information barriers and transaction costs are much lower today than in previous times, which allows demand to accumulate quicker.
Source: CoinMarketCap, Stooq.com, CQR
We can also analyse the maximum drawdowns reached in both asset classes and can see similar devastating results. Bitcoin investors lost 85% of their investment in 2015 while gold investors lost 72% by 2000, if they would have invested at peak levels.
Source: CoinMarketCap, Stooq.com, CQR
The current appreciation of Bitcoin and cryptocurrencies seem unlikely sustainable and there will likely be significant volatility ahead, which is not desirable for a store of value. However, as this analysis has shown, similar boom and bust cycles have occurred in gold, which has been dominant alternative store of value since beginning of time.
Twitter: CryptoQuantResearch
