A Review of the Crypto Market vs Gold

A question, are cryptocurrencies risk-on or risk-off assets?

In the aftermath of the pandemic, global assets, stocks, and cryptocurrencies reached an all-time high. In an unprecedented era of helicopter/ free money, investors with excess earnings fled into safe-haven assets to earn abnormal returns, as excess liquidity meant that asset prices grew exponentially following the injection of money. In 2021, bitcoin gained 57.4% 2021 vs the DJIA (+14.2%), S&P 500 (+16.6%), tech-heavy Nasdaq (+28.6%) and STOXX Europe 600 (+12.2%) showed strength of equity markets across American and European markets in 2021. Overall, the MSCI World Index gained 22.5% for context. In 2022, following the drawback of accommodative monetary and expansionary fiscal policy, Bitcoin and other blockchain assets have lost value, with Bitcoin down 53.2%, erasing nearly all of its 2021s gains.

In 2022, before falling on the back of the increased hawkish monetary policy to tackle rising persistent inflationary pressures. However, many cryptos traders and speculators that booked abnormal returns during the pandemic have seen the value of their assets tank. Although various crypto assets provide credible use cases, the harsh truth is that for some coins, the influx of excess money and excess system liquidity has undoubtedly led to an inflation of their intrinsic value.

The crypto asset-management space was experiencing somewhat of a bubble in 2020-2021. Firstly, vast system liquidity and direct cash payments from the government made it possible for speculation.

Increased liquidity leads to increased inflation

Inflation momentum and pressures, which were earlier tagged as “transitionary’’ by major central banks, have continued to build, leading to central bank tightening that will slow growth across the key economies. — Russia’s invasion of Ukraine has disrupted globally economy commodity markets and supply chains.

Rising inflationary pressures also caused significant concern in the U.S. economy. Inflation in the U.S. reached its 40-year high at 8.6% in Jun-2022. The highest estimate in three decades. The root of the current inflationary environment can be traced to supply-chain disruptions stemming from the pandemic—rising energy prices and the disequilibrium of the labour markets. Additionally, demand-pull pressures from the economic recovery and the lower base effect from 2020 gave rise to higher inflation.

What has prompted the sell-offs?

Following the uncertainty in the global economic environment and reduced quantitative easing, the appetite for risks has shifted towards more risk-free assets as investors become more risk-averse. This asset switch has led to the increased movement of investors, especially institutional investors, towards safe-haven instruments such as bonds. Also, we have seen the high infusion of bitcoin and other currencies into increased regulatory environments, which has somewhat limited their uses and turned them into traditional assets.

Bitcoin and other crypto-assets have long peddled the idea that they offer certain advantages over other traditional assets, one of which was their role as an asset that could potentially be a store of value or a hedge against inflation. These are some fundamentals that Gold offers to its holders? How has bitcoin fared?

Post-pandemic, most crypto-assets behaved more like risk-on assets, which defies one of the fundamental selling points of cryptocurrencies as a store of value and a hedge against inflation. Meanwhile, Gold has remained relatively stable in the same period, sustaining its reputation as an inflationary hedge and a safe store of value.