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Bitcoin Trips At Its First Major Test
Simon Constable , CONTRIBUTOR
Author | Broadcaster | Journalist | Commentator | Speaker.
It looks like Bitcoin didn't do that well in its first major test as a substitute for gold.
While the S&P 500 and the Dow Jones Industrial Average plummeted Monday, so did the price of bitcoin, which is the best known of all the so-called Crypto-currencies. Gold prices remained remarkably steady.
PARIS, FRANCE - FEBRUARY 06: In this photo illustration, a visual representation of the digital Cryptocurrency, Bitcoin (Photo by Chesnot/Getty Images)
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On Monday the Dow fell more than 4%, the S&P 500 sank by more than 3%, while Bitcoin prices dropped more than 15%, according to Coindesk.
Now, look at gold. Essentially, the price for bullion stayed steady. The price rose in the time between the London morning fix on Monday and the same time the next day, according to data from the London Bullion Market Association. Each day there are two fixes when most of the trading volume happens and the price for each is used as a benchmark. The price did fall when comparing the PM fix between the days, but only by less than $2, or a fraction of one percent.
In this instance, gold maintained its status as a safe-haven asset that performs in a different way to financial assets. Bitcoin, not so much. In fact, its price action was the opposite of gold.
It should be clear that the market moves earlier this week weren't exactly spectacular, at least by historical standards. Certainly, what we saw Monday in New York is nothing like the crash of October 1987 when share prices plunged by more than 20% in a single day.
In such extreme times, investors may find themselves selling gold to cover losses in other markets. Indeed, as seasoned gold market expert Jeff Christian has told me many times, people own gold for just such emergencies. In other words, they buy gold because they know there is always a ready market for the metal when they need to raise cash quickly. As I have mentioned before, we don't know whether the market for Bitcoin will be resilient in times of high financial stress. And to repeat so that it is clear, Monday's antics were not in any way extreme.
Steady Prices for Gold
However, what we did see Monday was a steady price for gold as other assets saw their value dwindle quickly. The $2 dip in gold can probably be put down to an increase in the price of the U.S. dollar during that day. The value of the dollar tends to move inversely with the price of gold.
Not ready for PrimeTime?
So what does this all say? Possibly that Bitcoin isn't ready for primetime yet or possibly that investors are still figuring out how the asset will perform in times of volatility.
The question that we should all be thinking about is simple: Will Bitcoin ever be a safe-haven asset, or is it something quite different?
That remains an open but important question. But so far the odds don't favor it being a substitute for gold.
Simon Constable is a writer, economics commentator, and a fellow at The Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise.
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