Bitcoin’s true colours shine in stampede to safety

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

LONDON, Feb 23 (Reuters Breakingviews) - Adversity tends to reveal true character. It’s certainly doing so for bitcoin. A rocky period for equities this year and the more recent escalation of geopolitical tensions are making it clearer that cryptocurrency is neither a decent hedge against a slumping stock market nor a gold-like refuge.

Even as the Russia-Ukraine crisis deepened on Tuesday read more , the price of bitcoin fell as much as 5% from last week’s close, to around $36,348. The decline marks a notable contrast to the rally triggered in traditional safe havens like U.S. and German government bonds, or gold, whose price on Tuesday hit its highest since June 2021.

Cryptocurrencies are also proving to be of limited use to investors trying to construct a balanced portfolio. Owning fixed income used to do the trick, but yields fell so low thanks to ultra-loose monetary policy that it became less helpful as a buffer when equities sank. Bitcoin and its peers appeared to march to their own beat in the early days of their existence and beckoned as an uncorrelated alternative. More recently, however, cryptocurrencies have gradually moved more in synch with publicly traded shares.

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What’s more, bitcoin’s daily swings in percentage terms are usually much larger than those in, say, the S&P 500 Index. Volatility can therefore bring big rewards when the cryptocurrency rises. It also means outsized losses when it falls.

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

An asset that amplifies the stock market’s rollercoaster ride simply does not qualify as a sanctuary or as a substitute for bonds in the quest for diversification. For thrill-seekers, though, it ticks all the boxes.

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

CONTEXT NEWS

- Bitcoin fell to just below $36,348 on Feb. 22, a 5% decline from the Feb. 20 close.

- The price of gold on Feb. 22 rose to about $1,914 per ounce, its highest since June 2021.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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Swaha Pattanaik is Global Economics Editor at Reuters Breakingviews, based in London. Previously Reuters’ EMEA financial markets editor, she writes about global financial markets, macroeconomics, and policymaking. She was posted to Paris as Reuters’ senior economics correspondent and to Brussels as its European economic and monetary affairs correspondent. Before then she was the head of the Reuters FX reporting desk in London. Prior to joining Reuters, she worked for Bloomberg, Euromoney, and consulting firm IDEA. She has an MSc in Political Theory and Political Sociology from Birkbeck and a BSc (Econ) in Mathematical Economics and Econometrics from the London School of Economics.