Bitcoin continued its volatile price moves this week, dropping by 9 per cent in US dollar terms on the last day of January, and ending a 41 per cent slide from the month’s peak on January 7.
The plunge was attribute by analysts to the threat of tighter regulation of trade in the blockchain-based currency in the US, plus a decision by Facebook to ban cryptocurrency ads from its network.
The most recent tumble happened just a day after Citi Group released an advisory note to its private banking clients arguing that the computer processor-mined currency could not perform the roles traditionally provided by gold bullion – namely, as a store of value and a defensive asset class in times of market turmoil.
Citi Private Bank analysts, reports Fortune magazine, found the volatile cryptocurrency surged up and down in value independently of other asset markets.
Citi estimated that Bitcoin prices movements correlated with gold approximately 5 per cent of the time, while it showed virtually zero correlation with the S&P 500 index of leading US shares.
Traditionally gold has shown a strong inverse correlation to share markets, because investors buy into the precious metal heavily to preserve wealth when other asset markets are falling.
Bitcoin and other cryptocurrencies are being driven by other forces, particularly by a kind of mania gripping young people in key cryptocurrency trading nations Japan and South Korea, according to the Wall Street Journal.
In South Korea nearly a third of workers have now invested in cryptocurrencies, which Human Resource Management magazine reports is creating the phenomenon of ‘bitcoin zombies‘ – workers who constantly check the price of their stake through the day.
South Korean Prime Minister Lee Nak-yeon, whose government has faced strong public resistance to its attempts to regulate cryptocurrency trade, said late last year that “if this matter is left as it is, there’s a sense that a serious distortion or pathological phenomenon will occur”.
A looming test
While cryptocurrency true believers see bitcoin and other cryptocurrencies such as Ethereum, Ripple and Litecoin taking over gold’s role as a store of value in troubled times, that theory may soon be given its first significant real-world test.
Both bond markets and share markets are considered to be fully valued, or even considerably overvalued, and overdue for a big pullback – the kind of correction that usually sends money pouring into the safe haven of gold.
Former chairman of the US Federal Reserve, Alan Greenspan, told Bloomberg TV on Wednesday: “We have a stock market bubble, and we have a bond market bubble … At the end of the day, the bond market bubble will eventually be the critical issue.”
Nobody can be sure what, if anything, will deflate those bubbles – though a “perfect storm” of oversupply in the bond market could send bond prices crashing, which would push up borrowing costs for governments and corporations around the world.
That would have a flow-on effect in share markets due to the impact on company profits of suddenly higher borrowing costs.
If a big sell-off in shares and bonds does take place, the reaction of gold and cryptocurrency investors will be instructive.
During the last major market rout, the $US2 trillion wiped off global markets by Britain’s shock Brexit vote result in June 2016 sent gold and bitcoin prices heading in opposite directions.
Gold gained in value by 10 per cent in the days following Brexit, while bitcoin’s value fell by 22 per cent before resuming its upward trajectory.