In a market downturn that has left investors scrambling, Bitcoin’s performance has ignited a fierce debate about its status as a “store of value.”
How This Bitcoin Crash Compares To Past Ones
On March 12, 2020, infamously dubbed “Black Thursday,” Bitcoin BTC/USD plummeted by nearly 50%, falling from around $7,900 to below $4,000 in a matter of hours.
This crash coincided with a broader market selloff, as the S&P 500 recorded its worst day since 1987, dropping 9.5%.
Fast forward to Aug. 5 of this year, and Bitcoin’s price volatility continues to mirror broader market trends.
At the time of writing, Bitcoin is trading at $54,200, having experienced a sharp 7.5% decline in the last 24 hours and a significant 20% drop over the past week, according to data from CoinGecko.
This downturn, while not as severe as the “Black Thursday” crash of 2020, nonetheless echoes that earlier event in its correlation with traditional market movements.
This correlation between Bitcoin and traditional markets has persisted.
In 2022, as the Federal Reserve aggressively hiked interest rates to combat inflation, both Bitcoin and stocks experienced significant downturns.
Bitcoin’s price fell from nearly $48,000 at the beginning of the year to around $16,500 by year-end, a decline of over 65%.
During the same period, the S&P 500 dropped by about 19.4%, entering bear market territory.
Bitcoin And The ‘Store Of Value’ Narrative
The data challenges the long-held narrative that Bitcoin serves as a hedge against traditional market volatility.
Proponents have often likened Bitcoin to “digital gold,” arguing that its fixed supply of 21 million coins makes it an ideal store of value and inflation hedge.
However, the cryptocurrency’s performance during recent economic turbulence has cast doubt on this theory.
Nonethless, Bitcoin advocates have consistently defended Bitcoin’s store of value proposition.
“Bitcoin is the highest, most dominant, digital property network. Think of it as the first digital money that’s not going to be debased,” Aliasgar Merchant, co-founder of Fath Consultancy, a firm promoting Web3 protocols, told Benzinga.
On the other hand, critics point to Bitcoin’s volatility as evidence against its store of value status.
Eswar Prasad, a professor at Cornell University has been a vocal skeptic, writing in a New York Times op-ed, “Bitcoin's unstable value has also made it an unviable medium of exchange. It is as though your $10 bill could buy you a beer on one day and a bottle of fine wine on another.”
Joe Weisenthal, a prominent financial journalist and Bloomberg TV host, captured he sentiment of many skeptics in a tweet, “The Bitcoin ‘store of value’ thesis is getting blown up right now. Bitcoin doesn’t look like The New Gold. It looks like 3 tech stocks in a trenchcoat,” encapsulating the growing skepticism about Bitcoin’s purported role as a safe haven asset.
Weisenthal’s observation highlights the increasing correlation between Bitcoin and traditional risk assets, particularly technology stocks.
This alignment challenges the long-held narrative promoted by Bitcoin enthusiasts that the cryptocurrency serves as a hedge against market volatility and inflation.
The increased institutional adoption of Bitcoin may explain its correlation with traditional markets.
A 2021 study by the Bank for International Settlements (BIS) found that one of the main policy takeaways is that regulation should be the same as for other asset classes since the goals of investors also overlap.
“A clarifying regulatory and supervisory framework for cryptocurrency markets may be useful for the industry. In fact, regulatory announcements have had a strong impact on cryptocurrency prices and transaction volumes,” the study found.
What About Bitcoin’s Correlation With Stocks?
Bitcoin’s correlation with traditional assets like stocks has been rising, potentially diminishing its appeal as a diversification tool.
Bitcoin is now correlated to traditional cyclical assets, rather than trading as a countercyclical safe-haven.
Despite these challenges, some investors remain optimistic about Bitcoin’s long-term potential as a store of value.
Cathie Wood, CEO of Ark Invest, has consistently defended Bitcoin’s role in a diversified portfolio.
“Last year we put out our bull case for Bitcoin. It was $1.5 million. With this institutional green light that the SEC [Securities and Exchange Commission] has provided, kicking and screaming though it did, the analysis we've done is that if institutional investors were to allocate a little more than 5% of their portfolios to Bitcoin, as we think they will over time, that alone would add $2.3 million to the projection I just gave you,” according to Wood.
The debate over Bitcoin’s status as a store of value continues to evolve.
While its performance during recent market downturns has raised questions, proponents argue that Bitcoin’s long-term potential remains intact.
Where ‘Digital Gold’ Goes From Here
As the market matures and regulatory frameworks develop, Bitcoin’s role in the global financial system may become clearer.
As the digital asset landscape continues to evolve, these dynamics will be a central topic at Benzinga’s Future of Digital Assets event on Nov. 19.
Industry leaders, investors, and innovators will gather to discuss the future of digital assets, exploring how cryptocurrencies like Bitcoin can integrate more effectively into the global financial system and fulfill their potential as stores of value.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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