Bitcoin’s true colors shine in security rush

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Representations of the virtual currency Bitcoin and Ethereum stand on a motherboard in this photo illustration taken May 20, 2021.

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LONDON, Feb 23 (Reuters Breakingviews) – Adversity tends to reveal true character. This is certainly the case for bitcoin. A tough time for stocks this year and the more recent escalation of geopolitical tensions make it more clear that cryptocurrency is neither a decent hedge against a falling stock market nor a gold-like safe haven.

Even as the Russia-Ukraine crisis deepened on Tuesday, bitcoin’s price fell 5% from last week’s close to around $36,348. The drop marks a notable contrast to the rally sparked in traditional safe havens like US and German government bonds, or gold, the price of which rose to its highest level since June 2021 on Tuesday.

Cryptocurrencies also prove to be of limited use for investors trying to build a balanced portfolio. It used to be that owning fixed income did the trick, but yields have fallen so low thanks to ultra-loose monetary policy that they have become less useful as a buffer when stocks have fallen. Bitcoin and its peers seemed to walk at their own pace early in their existence and presented themselves as an uncorrelated alternative. More recently, however, cryptocurrencies have gradually moved more in sync with publicly traded stocks.

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Additionally, bitcoin’s daily swings in percentage terms are usually much larger than those of, say, the S&P 500 index. So volatility can bring great rewards when the cryptocurrency rises. It also means inordinate losses when it falls.

The Eurekahedge Crypto-Currency Hedge Fund Index, for example, which tracks fund managers focused on decentralized digital currency, fell about a fifth in January, its biggest drop since November 2018. It was a tough month for hedge funds in general, but a broader industry benchmark only fell about 1% in the same month.

An asset that amplifies the roller coaster of the stock market simply cannot be considered a sanctuary or a substitute for bonds in the quest for diversification. For thrill seekers, however, it ticks all the boxes.

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(The author is a Reuters Breakingviews columnist. The views expressed are her own.)

BACKGROUND NEWS

– Bitcoin fell just below $36,348 on Feb. 22, down 5% from the Feb. 20 close.

– On February 22, the price of gold rose to around $1,914 an ounce, its highest level since June 2021.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

Reuters Breakingviews is the world’s leading source of financial news on the agenda. As the Reuters brand for financial commentary, we dissect big business and economic stories as they break out around the world every day. A global team of approximately 30 correspondents in New York, London, Hong Kong and other major cities provide expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and to www.breakingviews.com. All opinions expressed are those of the authors.

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