Bitcoin’s Plunge in Ukraine Invasion Undermines Its Digital Gold” Status

Bitcoin’s Plunge in Ukraine Invasion Undermines Its Digital Gold” Status

As Russian troops poured across the border into Ukraine this morning, the price of Bitcoin crashed. Gold, meanwhile, rose sharply despite paring gains by early afternoon in the US.

The sharp divergence that reflects movements in light of other breaking news, such as: Other factors, such as the potential for rising interest rates, have shown that Bitcoin has a stronger correlation with stocks such as technology stocks than with gold or other safe-haven assets.

Safe havens have always been considered a hedge against market turbulence or currency devaluation. One of Bitcoin proponents' biggest selling points is that it could be an even better hedge against inflation or market uncertainty than gold. But how and why?

Arguments for Bitcoin as digital gold

The theory behind Bitcoin being the digital version of gold is based on its supply and disinflationary nature. Those who help run the Bitcoin network are rewarded with Bitcoin for their services, and the amount of Bitcoin they earn is halved every four years. This means that the rate at which new Bitcoins come into circulation will steadily decrease until these rewards are exhausted, leaving a total of only 21 million Bitcoins that will ever exist.

Bitcoin proponents argue that gold is not provably finite – in fact, it might be dismantled of asteroids in the future – and it is less divisible, easier to forge, harder to transport and easier to confiscate.

Although we cannot be sure that humanity will mine gold or other precious metals from asteroids in the future, it is true that Bitcoin is more divisible, easier to transport, harder to confiscate, and arguably harder to counterfeit than gold – although this is mainly due to its intangible and digital nature.

Bitcoin's Performance as a Safe Haven

While Bitcoin has begun to fall, gold has risen amid market turmoil, leading many to reject the narrative of Bitcoin as a gold substitute and safe-haven asset.

As 2022 began and reports of inflation showed record-breaking increases, the safe-haven narrative of Bitcoin weakened. Bitcoin continued to fall while gold held its course.

Bitcoin fell further as news broke that Russia was increasing its presence on the Ukrainian border. The record-breaking inflation and geopolitical tensions in Eastern Europe fit exactly into the narrative that safe havens are supposed to protect against. Although Bitcoin was touted as one of these assets, perhaps even the best of them all, it offered no protection.

So why doesn’t Bitcoin behave like gold?

As more investors have added Bitcoin to their portfolios, the psychology surrounding the asset appears to have shifted from a libertarian, censorship-resistant inflation hedge to a purely speculative technology play.

Although it has always been a speculative investment, its correlation with riskier technology stocks and ETFs has recently become far stronger than its correlation with safe havens.

Many outspoken Bitcoin supporters still argue that the cryptocurrency should provide a hedge against inflation and social unrest due to its characteristics such as scarcity and resistance to censorship. Still, Bitcoin is looking less and less like a safe haven.

Possible reasons for Bitcoin's divergence include fears of over-regulation and a general lack of education about the asset class. Something Reports estimate that a third of all cryptocurrency investors know little to nothing about what cryptocurrency is or how it works. Until that changes and investors get clarity on the regulations, Bitcoin's potential role as a safe-haven asset will likely remain elusive.

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The post “Bitcoin’s Ukraine Invasion Plunge Undermines Its ‘Digital Gold’ Status” is not financial advice.