Another week, another record high for the price of gold. And another blow to the bitcoin fan club’s hopeful thesis about owning “digital gold”. This year has been hard for the bitcoin brigade: while real gold soared in value, their cryptocurrency didn’t. Correlation went out of the window. Gold is up 70% so far in dollar terms; bitcoin is down 6%.
In theory, conditions should have been perfect for bitcoin if, like gold, it is supposed to be a store of value in uncertain times. Geopolitical tensions have been high all year, with Donald Trump’s unclear intentions towards Venezuela now added to the mix. Or, if you take the view that bitcoin is a hedge against currency debasement by governments, the news flow ought to have been encouraging. The US budget deficit remains enormous: the International Monetary Fund predicts the country’s debts will climb from 125% to 143% of annual income by 2030, or more than Greece and Italy.
Alternatively, if bitcoin is meant to be a vehicle for tech-related enthusiasm, the artificial intelligence revolution should have offered semi-helpful breezes. Beyond the debate about a bubble in AI assets, chipmaker Nvidia’s share price is still up by a third since January.
Meanwhile, the regulatory backdrop was outright supportive. Crypto exchange-traded funds are now marketed by mainstream financial houses. The crypto-cautious UK financial regulator has published proposals to regulate many areas of the crypto market.
Therein – perhaps – lies half an explanation. Bitcoin is simply more boring now that it has been incorporated into the financial mainstream. If JP Morgan and BlackRock are referring to bitcoin as a regular class of asset, something of the revolutionary spirit is lost. Google searches for “bitcoin” are merely steady these days. Even Elon Musk has other things to tweet about.
As the chart shows, the paths of gold and bitcoin only properly diverged in October during a rapid sell-off in the latter. Precisely what happened on 10 October is still debated, but large selling by leveraged holders of bitcoin into a thin market, in reaction to a Trump tariff threat towards China, is part of the story. The point, though, is that bitcoin didn’t bounce back afterwards, as stocks and precious metals did. The crypto market as a whole shed more than $1tn of value in six weeks. From a high of $126,000 in early October, bitcoin now stands at roughly $87,000.
In a research note a month ago, Deutsche Bank analysts offered five factors as an explanation of the fall: a broader “risk-off” sentiment in markets in October, hawkish signals on interest rates from the Federal Reserve, less regulatory momentum than expected, thin liquidity and outflows from institutions, and profit-taking by long-term holders.
Its conclusion: “Whether bitcoin stabilises after this correction remains uncertain. Unlike prior crashes, driven primarily by retail speculation, this year’s downturn has occurred amid substantial institutional participation, policy developments and global macro trends.”
For true bitcoin believers every setback is a buying opportunity. Their faith tends to be unshakable and, given how the cryptocurrency has recovered from falls in previous years, one can’t say they are definitely wrong.
Yet it does also feel as if something cracked this year. When demand was high for a proper defensive hedge, investors preferred gold (and silver, which performed even better) over computer code that has failed to take off as a medium of exchange. And the year ends with questions being asked about the real depth of the market for bitcoin and its imitators. The speculative buzz ain’t what it used to be.
