Cryptocurrency enthusiasts have long hailed bitcoin as digital gold, but an analysis of the cryptocurrency’s performance against other assets shows that it has yet to achieve that status. What is still missing is widespread market perception of crypto assets as a store of value.
Cryptocurrencies remain a tiny fraction of global financial markets, with a total market capitalization of $1.1 trillion as of August, down significantly from a record market cap of $3 trillion. Cryptocurrency markets account for only 2.5% of the total US capital market.
However, S&P Global agrees with crypto enthusiasts who are convinced that cryptocurrencies and blockchain technology are here to stay. The firm noted that crypto-assets and blockchain technology are an ecosystem with significant differences from the traditional financial system. However, the collapse of TerraUSD shows that the basic laws of finance still apply.
One of the biggest debates surrounding cryptocurrencies for now is whether they should be considered currencies, commodities, securities, or something else entirely. To better understand what crypto assets are, S&P Global compared their performance to various traditional financial assets.
Bitcoin vs Gold
Of course, gold has been a store of value and a hedge against market downturns for thousands of years. Central banks use the metal as a reserve asset and to hedge against inflation. When Bitcoin launched, many cryptocurrencies called it “digital gold”.
As a result, the cryptocurrency has risen and risen over the years on the expectation that it could play a role similar to the yellow metal at some point.
However, to truly become digital gold, bitcoin would need a strong correlation with the metal’s performance over similar periods, something that has yet to happen. In a recent report on these comparisons, S&P Global explained that cryptocurrencies are highly volatile with the prospect of high returns, making them a high-premium asset rather than a store of value like gold.
For example, data from S&P Global shows that the price of gold rose more than 40% from mid-2019 to mid-2020 as investors turned to the yellow metal for protection during the COVID-19 pandemic. However, bitcoin did not behave in the same way during that 12-month period.
In addition, the price of gold has been volatile in 2022, but has shown a mostly bullish trend during periods of heightened geopolitical risk this year. Meanwhile, bitcoin’s performance has not followed periods of heightened geopolitical risk.
S&P Global noted that the price of bitcoin fell to its lowest level since November 2021, driven by rising inflation fears, a clear upward trend in inflation indices and growing supply chain shortages, energy concerns and military uncertainty amid the war in Ukraine.
On the other hand, gold rose during the first quarter, but average prices were higher than where they were before the pandemic. S&P Global also found that the volatility of gold is closer to that of stablecoins than other cryptocurrencies.
The firm emphasized that while bitcoin does not currently qualify as digital gold, it may at some point in the future.
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Crypto assets vs stocks
S&P Global also compared the performance of various cryptocurrencies with the performance of the S&P 500 and Nasdaq indexes. The firm found that the daily returns of cryptocurrencies are more volatile than stocks.
According to S&P Global, while cryptocurrency volatility is up more than 60% since May 2020, the S&P 500’s top three holdings, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN ) company’s volatility was not much higher than 40, which brought their volatility closer to stablecoins.
While many other reports have drawn attention to the correlation between bitcoin and stocks, S&P Global found that cryptocurrency markets are significantly uncorrelated with stocks, despite an increase in correlation in recent months.
To measure the relationship between stocks and cryptocurrencies, the company used Apple, Microsoft and Amazon as proxies for the stock market.
S&P Global found that between March 2020 and the first quarter of 2022, the return ratio between bitcoin and the three largest stocks increased during the pandemic. Furthermore, the firm found that correlations remained low.
It feels like the lack of comparability between cryptocurrencies and stocks is not surprising, as the drivers for cryptocurrencies’ valuation are different.
According to S&P Global, key performance factors of cryptocurrency markets include market confidence and acceptance, regulatory frameworks, technology, supply and demand or liquidity. On the other hand, the firm listed the drivers of traditional financial assets as operating profit, interest rates, inflation, monetary and fiscal policies.
Cryptocurrencies Against Each Other
While S&P Global found that cryptocurrency markets generally do not track stocks, it did find a remarkable correlation in historical returns with each other, with the exception of stablecoins. The firm noted that each cryptocurrency has a different origin story and was created at different times on different platforms using different protocols.
However, S&P Global’s analysis of the performance of various cryptocurrencies shows a moderate to high correlation with each other since 2018.
Of course, stablecoins like Tether and USD Coin are less volatile than other cryptocurrencies. However, S&P Global still found that their volatility is greater than and has a lower correlation with traditional pegged fiat currencies.
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