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Ethan Lou’s latest book is Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West

Advocates have long hailed bitcoin as an inflation hedge and safe-haven asset not just like gold but better than gold. Russia’s invasion of Ukraine in February validated that view. Since the war began, the price of bitcoin has risen to as much as US$45,000 per unit, up more than 13 per cent.

That, of course, flies in the face of what many in mainstream finance think. They view bitcoin as a risk asset, like technology stocks. People are supposed to put money into them only when they have extra with which to gamble, when they are fed and happy and can stomach risk, when borrowing costs are low. And there’s truth to that. Postinvasion, on the first sign of trouble and lean times, bitcoin’s immediate move was to join stocks in plunging as prices for traditional safe-haven assets such as gold shot up.

Now that bitcoin has emerged as a shining star amid the messy markets of war, the big question is whether it can remain up, and whether its current price movements put to ground the perennial question of what sort of asset it is.

Bitcoin is, in a way, not unlike gold. Practical applications form only a fraction of the gold trade. The precious metal’s greater value is derived from perception, scarcity and being resilient to external shocks. Cash can be burned or become worthless when the issuer falls, but not gold.

Similarly, because of bitcoin’s decentralized nature, no one party has control over it. Advocates therefore say that, unlike a company’s stock or a country’s currency, bitcoin’s price should be like gold’s in being largely immune to geopolitical factors. And that’s more than theory.

From 2017 to 2019, bitcoin’s correlation to the stock market was just 0.01 out of a maximum of 1, according to the International Monetary Fund. Meanwhile, by August, 2019, data from Bloomberg show that bitcoin’s correlation to gold was 0.827, having doubled over the previous three months. Gold and other safe-haven assets had jumped in 2020 as the U.S. killing of a top Iranian commander sparked fears of a new war – and bitcoin rallied, too, up 5 per cent on the news.

As the COVID-19 pandemic began in 2020, though, both bitcoin and gold started being correlated with stocks. While gold went back to being uncorrelated, as it always has been, bitcoin diverged. From 2020 to 2021, the correlation between the first cryptocurrency and the S&P 500 index was 0.36, IMF data show. It’s not that strong, but it’s statistically significant.

It’s not hard to understand why that happened. To see madness in the markets in the past year is, after all, not that controversial a thought. Lower borrowing costs and massive government stimulus led to greater appetite for risk. And so, much of the new money flowing into crypto came from the outside, from those who do not share the view that it’s a safe-haven asset.

In the past year, bitcoin’s correlation with stocks even turned higher than that of stocks and other assets, including gold. And repeated talk of rising interest rates rocked bitcoin prices throughout the past months. Froth and bloat have shown that perception matters as much as fundamentals. When war came, it’s not surprising that bitcoin prices did go down.

But then Ukraine officially started accepting cryptocurrency donations, which amounted to more than US$30-million. Talk abounded that Russia could use digital assets to dodge sanctions imposed by the West. That might be overstating it, but as the ruble rapidly lost value, demand in Russia for bitcoin did soar, with people paying as much as US$20,000 above market per unit. When wars are increasingly fought with money as much as missiles, bitcoin’s narrative of being the most resilient asset becomes more important.

That 180-degree shift in bitcoin’s correlation to other assets, however, does bring to mind this joke about the statistician on a hunting party. One shooter misses a deer by a few inches to the left and another by a few inches to the right. The statistician declares, “Yes, we got it!” He isn’t completely wrong. When an asset shows correlation one way at times and another way at others, it’s not that meaningful.

Therein might lie the best conclusion to draw from bitcoin’s price movement throughout the war. A few years of correlation to gold, one year or two to equities, one war – for a 13-year-old asset, nothing really amounts to a pattern. Bitcoin might just be digital gold, but fundamentals are not what they used to be. Any meaningful correlation with other safe-haven assets could take a long time to materialize.

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