The World Gold Council says cryptos failed to act like a safe haven in the Q4-2018 equity market downturn. Only gold did its job as a counter to risky assets

The World Gold Council says cryptos failed to act like a safe haven in the Q4-2018 equity market downturn. Only gold did its job as a counter to risky assets

Content supplied by the World Gold Council

In Q4 2018, as global stock markets experienced their worst quarter since 2009, cryptocurrencies had a prime opportunity to demonstrate qualities associated with safe havens like gold. However, cryptocurrencies, such as bitcoin, behaved like risky assets and fell while gold rallied.

Though comparisons have been made, we believe there are several reasons why cryptocurrencies are no substitute for gold. Specifically, gold is less volatile and enjoys a more liquid and established market. It has a well understood role in an investment portfolio and minimal overlap with cryptocurrencies on many sources of demand and supply.

As events of late 2018 indicated, the perceived ability of cryptocurrencies to serve as a liquid, safe-haven hedge and store of value in times of market stress, did not hold.

Bitcoin’s price behaviour resembled a technology stock as it fell 55% during the quarter, while the Nasdaq fell 19%

Chart 1: Bitcoin vs Nasdaq and gold

Q4 2018 price performance        

Bitcoin vs Nasdaq and gold

Gold price based on LBMA PM fix price
Source: Bloomberg, World Gold Council  

Bitcoin and the Nasdaq were heavily correlated (0.69); a factor that had not been apparent prior to the market pullback.

Over the same period, gold rallied 9.4% and was strongly inversely correlated with the Nasdaq at (-0.73).   

Finally, the market value traded in the bitcoin futures market fell sharply in the quarter at a time when volumes in global markets and gold rose (Chart 2).

The support of a strong two-way market was lacking, suggesting bitcoin – unlike gold – does not provide the liquidity needed in times of financial tension. 

Chart 2: Bitcoin futures market value traded

Average daily trading value of bitcoin futures fell in 2018
 Bitcoin futures market value traded

5-day daily average of CBOE bitcoin futures volume
Source: CBOE, Bloomberg, World Gold Council

The fourth quarter offered just one data point for bitcoin analysis, but it was an important one. This was one of the few periods during which true market stress has occurred since the financial crisis. And it should lead investors to reassess their reasons for investing in cryptocurrencies.

While cryptocurrencies may have a role to play in the financial markets, their behaviour in an environment of market uncertainty underscored that they are not a viable substitute for gold as a safe-haven.

This article is a re-post from here. The original article also has detailed Notes and Sources.

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Seriously! Cryptos are worthless!

The only way they can work is if they are a true currency backed by governments and traded based on economic performance and availability like a "real" currency.

Anyone turning to cryptos as a safe haven needs their head read!

You mean the real money that is issued as debt in ever-increasing numbers on a finite planet? The stuff which is already 'valuing' existing items like houses, upwards at increasing rates? The one which is usd to account all the future bets - like 'investments' and 'savings'?

Good luck with that one too - virtual reality comes to mind. This is the new dilemma for central 'banks' - trying to fit the currently-held collection of expectations into 'the race for what's left'


Few get it eh?

Trillions and trillions in "debt" that isnt under-written. Then when its called? The first stage is the small amounts the "saved" have will be swallowed up paying off the debt. When taht;s (quickly) exhausted then the reality that there is not enough assets nor raw materials to under-write it....

oh boy that epiphany moment coming to 7.5billion (- a few)

..US pension schemes. Empty when the time comes. Watch the pitchforks then.

@theglc "backed by governments"..
Venezuela, Iran, Russian, North Korea and few other countries. Their governments are backing the cryptos

Japan, Turkey, Estonia

Absolutely Agree.

An implausible scenario I know, but how would Crypto stack up in a Zombie apocalypse. No power, no computers = no Crypto.

This is why gold was, is, and will likely continue to be a useful commodity. It is physically real. You can store it and trade it regardless of situation. You can easily have different sizes (values). It doesn't degrade over time, and it is always there - regardless of electrical power, computing power, or digital/magnetic volatility.

Whatever happened to all the crypto spruikers? I haven't been called a "No-coiner" in ages.

They had a valid point - they were just trying to displace fractional reserve banking. - which will turn out to be the rort of all time. How much conventional 'currency' is recognised outside of computers? Same problem. Yes, there may well be a stampede to gold, and yes, some may mistake virtual gold for real. But there hasn't been enough to represent all claims for a century or so, and that can only get worse.

Energy can neither be created or destroyed, only transferred. Eventually a new "source" will be found.

We will always need a means of exchange. Unless you fancy doing every single thing yourself?

The problem is that in the same situation gold is .. worthless. Apart from using it to bash zombie skulls in it really doesn't serve any useful purpose. I'll take the equivalent volume in a decent steel over soft gold if we get to zombie apocalypse stage. A 25kg bag of rice would be worth a lot more than a kg of gold.

Yep - and frankinsense and myrrh. Note that there were only 3 wise men....... Always a minority......

..not worthless, it has the highest qualities of any metal. But that matters's value has been recognised for thousands of years - even while people starved. It was only recently that the US went to war over it with Gadaffi......enough said I'd say.

Every asset has risk, the main one with gold is that it can be confiscated from you by good (governments ) or by bad(robbers). If you store Bitcoin correctly it cannot be taken from you. A wise person would have both gold and bitcoin as hedges against fiat hyperinflation. As far as I know hyperinflation does not cause zombification in humans, maybe just starvation and war...

War, natural disasters, useless contractors digging where they shouldn't. All things lead to the same end - no power, phone, internet, water, etc...

Just ask those in Chch/Kaikoura during the earthquakes how useful would bitcoin have been?

If I might add my thoughts here – at least in relation to bitcoin because the other cryptocurrencies all have their own value propositions, the vast majority (especially utility tokens) likely being worthless. First, neither gold nor bitcoin is a true store of value. It is true that bitcoin is more volatile, but that is because of its properties (very liquid, low cost of trades, low market cap) – looking back at gold say in the 1980s then you see similar charts – with a gold investor in 1981 still behind on their initial investment in inflation adjusted figures. (For the record, I bought some bitcoin in Sep 2017 and the price in NZD was exactly the same as it is now). What is true (at least for now) is that gold is used as a hedge against risk in equities, while bitcoin does not do that. Probably this is because most equity holders are institutional investors and they do not yet have the means or desire to expose themselves to an asset whereby keys can be lost, wallets hacked etc. The solution for this is some form of warehousing or custodial holding – this is coming (see bakkt, fidelity, etfs etc) but they require regulatory approval and may be some way off. Rather, bitcoin seems to be a counter-trade to currencies or debt crises. The evidence for this can be seen in the volume and price charts for countries with fiscal / debt issues – most notable South America and Venezuela, where trading volumes are spiking and easily at all-time highs (crypto volumes in Venezuela are already double that of their stock market). Heck even prices appear to be at all time highs vs the Bolivar (although that is not necessarily hard). Other countries are joining the flock such as Iran which ‘un-banned’ cryptocurrency for investment and cross-border payment means. Forget trying to buy and safely hold gold in these countries. Crypto adoption is currently very small – about 20 million people at most so it won’t take long for this type of adoption to drive prices again. It is not inconceivable that we might see a similar scenario in other countries or even the West but on a larger scale. Also – even in an internet shutdown the bitcoin network could continue as you as you had a satellite phone (5-6 satellites were launched and allow for bitcoin transactions) – no doubt difficult but easier than carving up your gold. And I haven’t even got to the other non-currency benefits of blockchain (e.g. news today that SWIFT are trialling blockchain solutions using the ripple token).