Bitcoin $BTC has been touted as the next hedge or "digital gold". Traditionally, gold has been the "go-to" asset that holds value over long periods and is used to hedge against market downturns.
Thus, one of the key qualities of a hedge is that of value preservation. During the market's downturn, a hedge will need to be able to retain or increase its value against market correction or recession.
Extract from investing.com:
Gold historically performs well during market corrections because it maintains its value; its price holds somewhat steady, then tends to rise as investors move from stocks to gold if a recession is threatening. This makes it useful as a hedge—an investment that moves opposite another—against market corrections or recessions.
Comparison of BTC, gold and S&P500 index
To establish if BTC is a good hedge as "digital gold", it needs to display similar performance and trends like that of gold. Let us look into the following charts for us to ascertain this point of view.
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| 10 Mar 2022 - YTD BTC dropped 15.79% |
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| 10 Mar 2022 - YTD S&P500 dropped 10.63% |
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| 10 Mar 2022 - YTD Gold increased 9.40% |
Based on YTD results, S&P500 has dropped 10.63% with BTC dropping over 15.79%. BTC does not function as a hedge against the ongoing market correction. Gold, on the other hand, has increased its value by a margin of 9.40%. Gold has once again displayed its "hedging" quality and share a similar magnitude of "change" though in different directions.
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| BTC 1 year chart as per 12Mar2022 |
BTC has gained some traction in lieu of the Ukraine war as sanctions were applied to Russia. There was a surge towards $44,000 in early March 2022 and it has dropped to $39,236 as of this morning. However, we do note that there is an "uptrend" since Feb 2022 though it remains highly volatile. To be a hedging asset, value preservation is one of the key considerations.
From the height of $68,925 on 10 Nov 2021 to the current price of $39,236, this is a drop of 43% in the value of BTC. For the same period, Gold has risen from $1848.30 to $1992.30, a 7.79% increase in value. Such volatility could not qualify BTC as a hedge when compared to gold. A hedge should not lose 43% of its value in 5 months.
Conclusion (thus far)
Based on the current set of data, BTC does not provide the quality needed as a hedge when compared to gold. BTC displays volatility in price swings (43% drop since Nov 2021) and could not be suitable for value preservation. I would hope to review this again to see how the market, gold and BTC react to the coming Fed interest rate hike due in mid-March 2022. We should expect the gold to move contrary to the market.
Personally, BTC seems "more speculative" as an asset class, not suitable as a hedge. However, this remains a young product and let us monitor this over an extended period. Gold can be an asset class for us to consider in lieu of the current market decline. Macro factors like the Ukraine conflict and global sanctions against Russia will continue to "swing" the volatile market. As always, let us do our due diligence before we invest. For BTC, let us trade with money that we can afford to lose and let us avoid margin and leverage at all costs.
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