Is Bitcoin a safe bet during market sell-offs?

When investors ask about the value of cryptocurrencies like Bitcoin, advocates love to point out that the digital currency is a noncorrelated asset that can serve as a safe store of value when markets get choppy.

It's like digital gold, many say.

But that argument wasn’t holding water as global markets continued to slide Wednesday in response to plummeting oil prices and growing panic about the economic fallout from the coronavirus. While the S&P 500 and Dow Jones experienced some of their steepest drops in history, Bitcoin performed even worse.

While the the S&P 500 is down 14.15% over the past month, the price of Bitcoin is down 24.85%. The Grayscale Bitcoin Trust, an investment product trading on the OTCQX over-the-counter market that puts assets into Bitcoin, is down 34.36%.

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Though Grayscale modeled the Bitcoin Trust on commodity investments like the SPDR Gold Trust, it launched an ad campaign in October urging people to “drop gold” in favor of Bitcoin. The company even bought some television spots.

“Bitcoin has qualities that make it a better option than gold in today’s digital, global economy,” according to the campaign’s website.

Yet gold is up. The SPDR Gold Trust has gained 4.82% over the last month.

Grayscale declined to comment.

Jeffrey Levine, CEO and director of financial planning at Blueprint Wealth Alliance, said on Twitter that while he’s still open to investing in cryptocurrencies, he is reevaluating the claim that it’s a noncorrelated haven for assets.

Brian Armstrong, co-founder and CEO of cryptocurrency exchange Coinbase, tweeted that he was surprised to see Bitcoin’s price fall in the current market.

But Matt Hougan, global head of research at Bitwise Asset Management, pointed out that significant institutional investors now invest in Bitcoin. In response to the sell-off in equity markets, hedge funds and other large traders are pulling out of riskier assets.

Bitcoin is still seen as a risk asset by these firms, despite its value as a hedge, Mr. Hougan said.

“It’s a risk asset because it’s new, young and its long-term success is uncertain,” he added. “During normal market conditions, people focus on its role as a hedge asset. That’s why it has had zero correlation to the market over any meaningful long-term period ... and why it’s the best-performing asset of all time.”

“During times of crisis, however, people focus on the fact that is a risk asset, and so it sells off short term,” Mr. Hougan said.

He also pointed out that “not correlated” isn’t the same as “inversely correlated.” If Bitcoin went up every time equities fell, or vice versa, it wouldn’t be worth much from a diversification standpoint.

Looking at a longer time period still shows cryptocurrencies have effectively zero correlation with major asset classes, and Bitcoin is actually up overall since the first reported case of the coronavirus, Mr. Hougan said.

Overall, he remains bullish for Bitcoin’s long-term prospects and believes the cryptocurrency will bounce back when a sense of normalcy returns to markets.

But even a staunch advocate like Mr. Hougan sees short-term issues that could shake his confidence. For him, it's dips in the trading of Bitcoin futures.

“If that market is not trading hundreds of millions of dollars per day, that’s an issue,” Mr. Hougan said. “It dropped a few times [recently], and that’s a short-term thing I would worry about.”