Between 2020 and now, financial markets experts have attributed the characteristics of gold to Bitcoin and gone on to describe the digital asset as the new safe haven, or digital gold.
In fact, JPMorgan Global Market Strategist Nikolaos Panigirtzoglou, in a note to clients on Oct.6, 2021, said “Bitcoin’s allure as an inflation hedge” was the reason for growing investor interest in the unregulated digital asset.
An inflation hedge is an investment that will hold its value even when prices go up or the currency’s worth goes down. It means investors were drawn to Bitcoin because of its attractiveness as a store of value, just like the world’s most reliable safe-haven asset, gold.
But the Russia-Ukraine war has shown Bitcoin, the world’s most dominant cryptocurrency, to be a risk asset. A risk asset, as the name implies, is any asset that has a significant degree of volatility or risk.
Just like other risk assets like equities, real estate or currencies, Bitcoin plunged with the Russian invasion of Ukraine and has remained largely subdued even when gold rose to an 18-month high last week.
The Reason for This Bitcoin Misconception
It was the same in January 2020, when nations started announcing Covid-19 restrictions to halt the spread of the pandemic, the value of Bitcoin declined with other risk assets as shown in the chart below, whereas the value of gold surged as shown in the second chart.
Here is where it gets interesting. Bitcoin at the time was trading well under $10,000 per coin but started gaining momentum once investors, largely retail investors, started factoring in Bitcoin halving. Bitcoin halving is a process in which the reward of Bitcoin miners is halved after building additional 210,000 blocks. Therefore, since miners’ reward is the only means by which Bitcoin is available for purchase, the value of Bitcoin rises thanks to the decline in supply.
It was Bitcoin Halving that occurred in May 2020 during the peak of Covid-19 that bolstered the value of Bitcoin above $22,000 a coin and subsequently attracted institutional investors already struggling to find the right investment at a period when all economies were closed. The size of their investments coupled with the scarcity created by Bitcoin Halving was what led to the Gap, circled in the first chart (institutional investors entry).
However, because this happened at a period of high global uncertainty and risk, and coincidentally during COVID-19, experts with little or zero knowledge of Bitcoin technology started pushing safe haven narratives.
Here is Why Bitcoin is Not a Safe Haven Asset or Digital Gold
A safe haven asset is that asset that can at least retain its value or appreciate during financial markets downturns. Please note that while it does not guarantee positive returns, it maintains its value in a crisis.
In fact, from the second chart, Gold took off immediately COVID-19 broke out in Wuhan, China in November 2019 and rose above $2067 per ounce by June 2020 while Bitcoin continued to struggle until after halving as seen in the first chart.
As clearly shown in the two charts, the value of Gold started declining in June 2020 when tech stocks started thriving on growing remote workspace and gradual adaption to the new normal. Bitcoin, NASDAQ, Standard and Poor 500, and other risk assets were rising simultaneously as shown in Chart 1, 3, and 4. Again, a critical look at the last few weeks of the three charts revealed that Bitcoin, NASDAQ and Standard and Poor 500 have been on the decline in response to the Federal Reserve projected rates hike and the Russia-Ukraine war. Indicating that despite Bitcoin’s huge returns when compared to traditional assets, it mirrored the characteristics of risk assets than it has been established.
Also, since Russia invaded Ukraine, Bitcoin has failed to replicate the 2020/21 run even with people projecting that Russia will turn to cryptocurrency to avoid the impact of sanctions. The reason is not far-fetched, this is not a halving year. The next Bitcoin Halving is in 2024. Suggesting that Bitcoin might be at the beginning of a bearish period despite global happenings.
It was based on these modalities that I established how Bitcoin could hit $50,000 a coin as early as 2020. Here is an excerpt of the article titled, Bitcoin Halving: Nigeria, Others Get Ready For Uncertain Bitcoin Future, written on May 11, 2020, “Unlike the Central Banks, Bitcoin is not manually regulated rather its algorithm has been engineered to gradually reduce the number of Bitcoins that can be created over time.
“Therefore, while the supply of Bitcoin will continue to reduce, its demand will remain constant. A process that if eventually worked could see the digital currency hitting $50,000 a coin or even $1 million as more money would be chasing fewer coins.”
Bitcoin thrives on this methodology and not the assumption that it is a store of value or inflation hedge.
Bitcoin Plunges Below $30k as Cryptocurrency Market Recovers from Bearish Trend
Bitcoin still remains the number 1 crypto asset in the market with a market dominance of 44.57%
Bitcoin (BTC), the world’s most dominant cryptocurrency, pared losses to trade at $29,844.20 a coin as the global cryptocurrency market recorded a surge of 4.87% over the last 24 hours.
The asset recorded gains of 0.57% in the last 24 hours but dropped 9.26% in the last seven days. The live market capitalisation of the asset is pegged at $564,744,032,506 USD, while the 24-hour trading volume of the coin stands at $31,166,243,069 USD.
While the global crypto market is recovering from the bearish trend that gripped LUNA Coin and other assets last week, only a few top cryptocurrencies have shown signs of recovery.
Bitcoin, which is one of the top-performing cryptocurrencies, hit a 24-hour low of $29,412.58 and a 24-hour high of $31,308.19.
However, the fundamentals show that some investors are holding on to their BTC. One of them is value investor, Bill Miller, who is still bullish about Bitcoin despite recent price declines.
The founder of Miller Value Partners told CNBC that he still owns lots of Bitcoin amid market volatility, noting that he is confident about the prospects of the asset.
Meanwhile, President Nayib Bukele of El Salvador has announced that a meeting of 44 countries to discuss Bitcoin and financial inclusion will hold on Tuesday, May 17.
Bitcoin’s popularity soared after El Salvador’s adopted the coin as legal tender. The meeting is expected to highlight the benefits of using Bitcoin.
”Tomorrow, 32 central banks and 12 financial authorities (44 countries) will meet in El Salvador to discuss financial inclusion, digital economy, banking the unbanked, the #Bitcoin rollout, and its benefits in our country,’’ Nayib Bukele said.
However, despite the popularity enjoyed by Bitcoin, the network has come under criticism over its proof-of-work (PoW) consensus algorithm which is energy-consuming.
The PoW consensus algorithm, which validates Bitcoin transactions, relies on computers run non-stop to verify transactions and create new blocks for the network, a process known as mining. Over the years the number of computers doing this work has also steadily risen, leading to huge energy consumption.
Sam Bankman-Fried, the CEO of the fast-growing crypto exchange FTX, recently highlighted this concern when he stated that Bitcoin is not a suitable payments network.
To be clear I also said that it _does_ have potential as a store of value. The BTC network can’t sustain thousands/millions of TPS, although BTC can be xfered on lightning/L2s/etc,” he told he told the Financial Times via a tweet.
Professional Investors Expect Major Improvements in the Regulatory Environment for the Crypto/Digital Asset Market
72% of wealth managers, pension funds and other institutional investors expect the regulatory environment for crypto/digital to improve and become more constructive over the next two years
According to new research from London-based Nickel Digital Asset Management (Nickel), Europe’s largest regulated and award-winning digital assets hedge fund manager founded by senior traders and investment professionals formerly from major financial institutions including Goldman Sachs and JPMorgan, 72% of wealth managers, pension funds and other institutional investors expect the regulatory environment for crypto/digital to improve and become more constructive over the next two years. Nickel commissioned research with 200 professional investors from across seven countries who collectively manage around $329 billion in assets.
The study reveals 23% expect no change in the regulatory environment, and just 7% anticipate it will deteriorate.
Some 62% of professional investors expect Germany and the UAE to take a huge leap forward as market leaders in the crypto/digital asset space because of their proactive stance in developing a constructive and robust framework for the crypto/digital asset sector. However, this is likely to lead to other major countries following their lead as they fear missing out – this is the view of 63% of professional investors surveyed.
In terms of when professional investors believe financial regulators will agree a global framework for crypto/digital assets, 23% expect it to happen this year, 29% in 2023 and 28% in 2024, with the remainder anticipating it will take longer.
Overall, as regulation of the crypto/digital asset market develops, 20% of professional investors believe it will be a catalyst for a dramatic increase in wealth managers, pension funds and other institutional investors increasing their allocation to crypto and digital assets. A further 36% believe it will lead to a slight increase in their allocation.
Henry Howell, Head of Business Development, Nickel Digital, said: “We are only at the very beginning of the digital asset sector, and the most exciting developments have yet to happen. Record inflows of venture capital in 2021, continued product innovation at the blockchain level and ongoing adoption of the largest players in traditional finance all point to growth of the already multi-trillion-dollar asset class.”
Bitcoin Dip Moves With External Elements
Yesterday, Bitcoin dropped below $30,000 before recovering a portion of those losses. The selloff has been part of a multi-day slide that goes well beyond Bitcoin and cryptocurrencies. The three major American stock exchanges also closed Monday with losses, including with the S&P 500 dropping to its lowest point in more than twelve months. Thursday, the Dow Jones and NASDAQ both posted their worst single days since 2020.
“As Bitcoin continues to track similar movements with the stock market, particularly tech stocks, the correlation gets continuously clearer. While that may not bode well for arguments that cryptocurrencies are still inflation hedges, it does indicate that they have value in their own right,” said Richard Gardner, CEO of Modulus, a US-based developer of ultra-high-performance trading and surveillance technology that powers global equities, derivatives, and digital asset exchanges.
“It is important to see this slide in its full context. Inflation is staggering, the war in Eastern Europe rages on, and there’s a great deal of uncertainty and fear in the markets. However, while Bitcoin is making the headlines, there’s unfortunate news for most financial vehicles,” noted Gardner.
“The Australian and Canadian dollars have taken a hit, and oil just dropped 6% in one day — in part because there are worries that Covid-19 lockdowns in China may continue to affect economic activity,” Gardner said.
Modulus is known throughout the financial technology segment as a leader in the development of ultra-high frequency trading systems and blockchain technologies. Modulus has provided its exchange solution to some of the industry’s most profitable digital asset exchanges, including a well-known multi-billion-dollar cryptocurrency exchange. Over the past twenty years, the company has built technology for the world’s most notable institutions, with a client list which includes NASA, NASDAQ, Goldman Sachs, Merrill Lynch, JP Morgan Chase, Bank of America, Barclays, Siemens, Shell, Yahoo!, Microsoft, Cornell University, and the University of Chicago.
“Bitcoin continues to track with tech stocks. The issue isn’t industry related. We’re seeing selloffs across the markets. Consumer confidence is low, inflation is up, and fear is high,” Gardner said.
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