Bitcoin Isn’t Digital Gold – Or Isn’t It Yet?

Bitcoin has long been referred to as “digital gold,” but an examination of the cryptocurrency’s performance in comparison to other assets reveals that it has yet to earn that title. One thing that is still lacking in the market is a widespread perception of crypto assets as a store of value.

Cryptocurrencies continue to be a minor component of global financial markets, with a total market capitalization of $1.1 trillion as of August, a significant decrease from their all-time high of $3 trillion. The crypto markets account for only about 2.5% of the total equity market capitalization in the United States.

S&P Global, on the other hand, agrees with crypto enthusiasts who believe that crypto assets and blockchain technology are here to stay. According to the firm, crypto assets and blockchain technology form an ecosystem that differs significantly from the traditional financial system. However, the demise of TerraUSD demonstrates that the fundamental laws of finance remain in effect.

For the time being, one of the most heated debates about cryptocurrencies is whether they should be classified as currencies, commodities, securities, or something entirely different. S&P Global compared the performance of crypto assets to that of various traditional financial assets in order to better understand what they are.

Bitcoin vs. Gold
Of course, gold has been used for thousands of years as a store of value and a hedge against market downturns. Central banks use gold as a reserve asset and as an inflation hedge. When bitcoin was first introduced, many crypto experts referred to it as “digital gold.”

As a result, the cryptocurrency has rallied on and off over the years due to expectations that it will one day play a similar role to gold.

However, for bitcoin to truly become digital gold, there must be a strong correlation with the metal’s performance during similar periods, which has yet to occur. S&P Global explained in a recent report on those comparisons that crypto assets are significantly more volatile with the potential for higher returns, making them more of a high-reward asset than a store of value like gold.

According to S&P Global data, the gold price increased by more than 40% from mid-2019 to mid-2020 as investors sought refuge in the yellow metal during the COVID-19 pandemic. However, bitcoin did not behave similarly over that 12-month period.

Furthermore, while the gold price has been volatile in 2022, it has largely trended upward during this year’s periods of increased geopolitical risk. Meanwhile, the performance of bitcoin did not correspond to periods of increased geopolitical risk.

According to S&P Global, the bitcoin price has dropped to its lowest level since November 2021, owing to rising inflation fears, a clear upward trend in inflation indices, and growing supply chain shortages, energy concerns, and military uncertainty in the midst of the Ukraine war.

Gold, on the other hand, rallied during the first quarter but has averaged prices higher than before the pandemic. S&P Global also discovered that gold’s volatility is more similar to that of stablecoins than to that of other cryptocurrencies.

The firm emphasized that, while bitcoin does not currently qualify as digital gold, it may do so in the future.

Equities vs. Crypto Assets
S&P Global also compared the performance of various cryptocurrency assets to the S&P 500 and Nasdaq indices. The firm discovered that the daily returns on crypto assets are far more volatile than those on equities.

According to S&P Global, cryptocurrency volatility has remained above 60% since May 2020, while the volatility of the S&P 500’s top three holdings, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN), did not rise much above 40, putting them closer to stablecoin volatility.

While many other reports have highlighted a correlation between bitcoin and equities, S&P Global discovered that, despite an increase in correlation in recent months, the crypto markets are not significantly correlated with equities.

The firm used Apple, Microsoft, and Amazon as equity market proxies to assess the correlation between equities and cryptocurrencies.

Return correlations between bitcoin and the three largest equities increased during the pandemic period from March 2020 to the first quarter of 2022, according to S&P Global. Aside from that, the firm discovered that correlations remained low.

It appears that the lack of comparability between crypto assets and equities is unsurprising given the differences in the drivers of crypto valuations.

According to S&P Global, market confidence and adoption, regulatory frameworks, technology, and supply and demand or liquidity are the key performance drivers of the crypto markets. Traditional financial assets, on the other hand, are driven by operating profits, interest rates, inflation, and monetary and fiscal policies, according to the firm.

Cryptocurrencies pitted against one another
Although S&P Global discovered that crypto markets do not track equities in general, it did discover a significant correlation in historical returns with each other, excluding stablecoins. The firm stated that each cryptocurrency’s origin story differs from the others and that they were created on different platforms using different protocols at different times.

However, S&P Global’s analysis of the performance of various cryptocurrencies since 2018 shows a moderate-to-high correlation.

Stablecoins, such as Tether and USD Coin, are, of course, far less volatile than other crypto assets. S&P Global discovered, however, that their volatility was greater than that of traditional pegged fiat currencies, and that they have a low correlation with them.