Bitcoin: Store of value or fool’s gold?

With most people still recovering from their Christmas lunches and all the resolutions and empty self-promises for 2023 starting to take priority, I decided that now might be a prudent time to look at the promises bitcoin held back in 2021, and whether it was also just an empty promise, like most of the New Year’s resolutions people promise themselves.

Back then (in 2021), I compared the writing of an article for or against bitcoin to the equivalent of sticking your head in a beehive and hoping you don’t get stung. Indeed, I did, from all resorts. I received a lot of flak to dare and warn people against the volatility and risks of putting your money into something such as bitcoin. After all, there were people who made millions out of bitcoin and other crypto assets.

Sure, but perhaps these same people should send Sam Bankman-Fried a message to make sure he is doing okay today. If you are unsure what I am referring to here, read the entire FTX story. People lost money. Millions.

And if you are still in doubt, perhaps give Johann Steynberg from MTI a call.

Anyway, this is not the point of this article. Scammers pop up left, right, and centre. In and outside the crypto sphere.

What I would like to achieve in this article is to confirm whether bitcoin was, indeed, a store of value or fool’s gold.

What is a store of value, and what should it achieve?

Up until the rise of bitcoin, gold was initially regarded as a safe store of value. For most people today, gold is still used for the aforementioned. Gold is a safe haven asset, protecting capital in volatile markets and hedging your money against a drawdown in other asset cases, i.e., equities and bonds.

But, as expected, a lot of investors started to see bitcoin as the new store of value. They felt that bitcoin was the new safe haven asset.

But indeed, it was not. Here is why:

Compared above is the five-year figure for the following assets:

  1. Bitcoin;
  2. S&P 500 (equities); and
  3. Gold price.

Over this period, the biggest drawdown across all three assets was found in bitcoin. This drawdown was 75% from the peak of the bitcoin price in November 2021. So much for a safe haven asset? Currently, bitcoin is still down 75% since the peak in price of $64 000.

The biggest drawdown in the S&P 500 in a five-year period was 30%, which happened in March 2020 at the initial lockdowns. Once again, proof that this asset does not hold up in volatile macroeconomic environments.

The purpose of a safe asset is to protect investors against volatile markets, and if the macro-economy is shaken up, to still bring some form of foundation in your portfolio, something bitcoin never has done.

The extremely volatile nature of bitcoin simply does not make for a base case for a solid investment. If bitcoin is part of your portfolio at all, you should understand that this should be regarded as part of a high-risk allocation in your portfolio.

Further to the volatile nature of crypto, is the fact that it is also not yet regulated in South Africa and many other countries. This makes any crypto investment even more susceptible to fraudsters and scammers, as there is no foot for the investor to stand on when you have been taken for a ride.

Crypto investments should most definitely be done with extreme caution and the right advice where possible. Crypto investments are NOT safe haven assets. Do not fall into this trap, as this could lead to significant capital losses which in most cases, will never be recovered again.

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