In Q4 2018, as global stock markets experienced their worst quarter since 2009, cryptocurrencies had a prime opportunity to demonstrate qualities associated with safe havens like gold. However, cryptocurrencies, such as bitcoin, behaved like risky assets and fell while gold rallied.

Though comparisons have been made, we believe there are several reasons why cryptocurrencies are no substitute for gold. Specifically, gold is less volatile and enjoys a more liquid and established market. It has a well understood role in an investment portfolio and minimal overlap with cryptocurrencies on many sources of demand and supply.

As events of late 2018 indicated, the perceived ability of cryptocurrencies to serve as a liquid, safe-haven hedge and store of value in times of market stress, did not hold.

Bitcoin’s price behaviour resembled a technology stock as it fell 55% during the quarter, while the Nasdaq fell 19%

Chart 1: Bitcoin vs Nasdaq and gold

Q4 2018 price performance        

Bitcoin vs Nasdaq and gold

Gold price based on LBMA PM fix price
Source: Bloomberg, World Gold Council  

Bitcoin and the Nasdaq were heavily correlated (0.69); a factor that had not been apparent prior to the market pullback. Over the same period, gold rallied 9.4% and was strongly inversely correlated with the Nasdaq at (-0.73).   

Finally, the market value traded in the bitcoin futures market fell sharply in the quarter at a time when volumes in global markets and gold rose (Chart 2). The support of a strong two-way market was lacking, suggesting bitcoin – unlike gold – does not provide the liquidity needed in times of financial tension. 

Chart 2: Bitcoin futures market value traded

Average daily trading value of bitcoin futures fell in 2018


 Bitcoin futures market value traded

5-day daily average of CBOE bitcoin futures volume
Source: CBOE, Bloomberg, World Gold Council

The fourth quarter offered just one data point for bitcoin analysis, but it was an important one. This was one of the few periods during which true market stress has occurred since the financial crisis. And it should lead investors to reassess their reasons for investing in cryptocurrencies.

While cryptocurrencies may have a role to play in the financial markets, their behaviour in an environment of market uncertainty underscored that they are not a viable substitute for gold as a safe-haven.  

Read more in our report: Cryptocurrencies are no substitute for gold, January 2018.

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