People hold bitcoin for many reasons: it’s a great speculative play, it’s volatile, and it’s a bet on an entirely different future for money.
More recently, commentators have pointed out the increasingly tight correlation with gold, which suggests investors now see it as a safe haven asset in a time of financial turmoil – which is what it was originally designed to be.
CoinDesk recently posted this graph showing a 60-day correlation, which appears more convincing since the onset of the Covid pandemic in March.
Back in January, Cointelegraph (correctly) pointed out that the correlation was not that convincing. But that was a whole nine months ago. Things have changed since then.
It has also been pointed out that there is a correlation between bitcoin and Tesla’s share price. Before that, it was bitcoin and the S&P 500.
The recent correlation with gold coincides with declining confidence in major currencies during the 2020 financial crisis.
What this also suggests is that bitcoin is cleaving away from its previous correlation with US stocks, and forging a new path more closely aligned with safe haven assets such as gold.
The $250m bitcoin purchase
In August, Nasdaq-listed MicroStrategy announced that it had purchased $250 million bitcoin, which now forms the major component in its treasury reserve holdings.
“Our investment in bitcoin is part of our new capital allocation strategy, which seeks to maximise long-term value for our shareholders,” said Michael J Saylor, MicroStrategy’s CEO.
“This investment reflects our belief that bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions.
“MicroStrategy has recognised bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made bitcoin the principal holding in its treasury reserve strategy.”
Covid has pushed MicroStrategy and others like it into bitcoin. The economic and health crises triggered by Covid, and the unleashing of central bank printing presses as a response to these crises has spread panic across the world.
History has shown that the bitcoin-gold correlation waxes and wanes, but has recently tightened considerably. Just as the rand is a perception index for SA Inc, so we may come to see bitcoin as a perception index for the state of the global financial system.
The similarities, however, should not be overstated. Bitcoin will never mint more than 21 million coins. Gold – while of limited physical supply – suffers no such constraint.