US-China trade war has been escalating over the past few weeks and this has led to an intense currency competition across the globe. Amid the chaos, investors are now looking towards various store-of-value assets such as gold to prevent their monetary resources.
Although bitcoin price witnessed a rise just recently as it spiked past $12,000, it is now back in the $11,845 while showing a 2.06% upward change at the time of writing. Still, the asset has risen significantly from lower $9,000s to this current price level.
Gold has been seeing a significant inflow of capital in its ecosystem and over a week’s period, it is trading up nearly 6%. When it comes to bitcoin, it has been seeing its erratic growth and drops phases but it is rather unclear at this point whether the gradual upward trend is a result of the trade war or just a by-product of the overall growth it has seen over the past months since the correlation with gold is on the lower side.
For this speculation-based asset, it is difficult to discern whether this price spike is a result of the US-China trade war or not. Although gold and bitcoin are seemingly moving up with a strong correlation in reaction to the market fluctuations and currency competition, it is not as strong as previously assumed.
As stated by Mati Greenspan, a senior market analyst at eToro, in a recent blog:
With everything above, one might expect bitcoin to come in as a hedge and react to things like trade wars and or rate cuts, but the data suggests otherwise.
Here we can see bitcoin’s 90-day correlation with gold (blue), the stock market (grey) and the US dollar (red). As you can see, connections between BTC and the rest of the markets are pretty loose here. For all three assets measured against bitcoin, the 90-day correlation factor is less than 0.2, meaning it’s virtually nonexistent.
Although bitcoin emerged as a peer-to-peer decentralized currency amid the financial crisis of 2008, it has evolved more into a store-of-value asset than a usable currency on the ground. Due to its value storing capabilities that resemble that of gold, it is often termed as the “digital gold“.
Some of bitcoin’s staunch proponents even believe that the digital asset is going to replace gold in the future as developments are being made in this space with huge capital flowing in. While gold has been around since the ancient times, bitcoin is facing a hard time rivaling it being only just a decade-old. Besides, the market capitalization of bitcoin is around $200 billion while for gold the market cap lies around $8 trillion.
The lack of trust in bitcoin as a store-of-value against gold also arises due to its price dependence on pure speculation. While gold has a physical existence, bitcoin is just an online-based virtual digital currency whose price has no backing in the physical world. This lack of backing also makes its price prone to extreme fluctuations. Due to this lacking, the digital asset is often seen going through erratic and volatile bull/bear runs too often.
The dependence of price on FOMO and hype also makes it an asset that can’t be trusted to full extent. Besides, regulations around this technological innovation is not concrete which makes scams and illegal activities seep into this world. The rush toward gold instead of bitcoin is hence understandable amid the global currency competition.
While gold is universally accepted as a valuable asset, there are some entities in the financial world that certainly do not believe in the effectiveness of bitcoin as currency or store-of-value altogether. People like Warren Buffett even dismiss the asset completely. Still, bitcoin has come a long way against the ancient standard gold in a mere decade. It remains to be seen how much market capitalization bitcoin is able to sweep towards itself moving forward as steps to better regulate it are taken by official authorities.