Calling Bitcoin “Digital Gold” Doesn’t Make It So

The stock market has had a bad week, with the Dow Jones Industrial Average posting a loss of 1,300 points, more than five percent. Global markets have followed suit, and there’s real anxiety that this could be the end of a historic bull run—the DJIA has risen close to 60 percent in just the last two years.

This also feels like the most ominous stock slump since the collapse of cryptocurrency prices in January. That makes it a good moment for testing bitcoin boosters’ frequent claim (recently echoed by Steve Wozniak) that bitcoin or other cryptocurrencies can act as “digital gold,” a store of value that’s uncorrelated with traditional market forces.

Early this week, stocks went south, driven by factors including rising interest rates and anxiety about a trade war, while the price of bitcoin remained stable. This was not surprising to StratX research advisor Dan Sheridan, who says interest rates and trade factors have “no bearing on what’s going on in the crypto marketplace.” In crypto, no federal bank sets interest rates, and governments barely regulate cross-border trades.

But then, late Wednesday, bitcoin dropped by more than five percent—putting it in league with the Dow Jones. Meanwhile, actual gold rallied 2.9 percent to hit $1,230 an ounce.

That might seem to be a clear rebuttal to the “digital gold” thesis. But the argument isn’t so much that bitcoin’s price won’t fluctuate, just that it won’t change for the same reasons as things like stocks or oil prices. And some market observers blame the latest drop on mounting, crypto-specific concerns about the Bitfinex exchange and the associated “stablecoin” Tether. Both of those have shown signs of instability in recent days, and a failure of either could trigger a full-scale crypto-collapse. The incredible sharpness of the Wednesday decline—most of it happened in just three hours—is also specific to the smaller, more volatile, and more frequently manipulated crypto market.

But another ironic possibility is that bitcoin has become yoked to the larger market by its own success. Rob Nance, CEO of CityBlock Capital, posited that the collapse of Asian stock markets—Taiwan’s market was down nearly 6 percent Thursday—might have played a role in bitcoin’s drop, which also drove down most other crypto assets. A big stock market decline can make investors desperate for cash, particularly if they’re leveraged and get hit with a margin call. Traders in Asia, where cryptocurrency is particularly popular, might have had to sell cryptocurrency to cover stock losses.

That hypothesis illustrates one specific way cryptocurrency prices can be pulled down by broader conditions. Another hard truth is that, outside of “pure” cryptocurrencies like bitcoin or Monero, many blockchain assets are speculative bets on technology that’s years away from widespread use. In a broad stock downturn, investors will generally make a “flight to quality,” moving capital from more speculative assets (like the stocks of small companies) to more reliable ones. And in fact, most of the top 20 blockchain tokens plunged by double digits during the late Wednesday swoon, making bitcoin’s five percent drop look great by comparison.

Of course, none of this tells us anything about the influence of the real-world economy. That’s still humming along just fine, and has been for most of bitcoin’s existence. But what if, someday soon, it’s not? Instead of traders selling off their ETH to cover margin calls, you might see unemployed 20-somethings selling off their decimated Dentacoin stash—and more importantly, their bitcoin—to buy groceries. That’s when we would find out just how shiny “digital gold” really is.