Bitcoin: store of value or fool’s gold?

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With most people still recovering from their Christmas lunches and all the resolutions and empty promises for 2023 starting to take precedence, I decided now might be a good time to look at the promises that bitcoin has retained in 2021, and if this was also the case. just an empty promise, like most New Year’s resolutions people make to themselves.

At the time (in 2021), I compared writing an article for or against bitcoin to the equivalent of sticking your head in a beehive and hoping not to get stung. Indeed, I did, of all the stations. I got a lot of flak for being daring and warning people about the volatility and the risks of putting your money in something like bitcoin. After all, there were people making millions with bitcoin and other crypto assets.

Sure, but maybe those same people should message Sam Bankman-Fried to make sure he’s okay today. If you’re not sure what I’m referring to here, read the full FTX story. People lost money. Millions.

And if you’re still in doubt, maybe call MTI’s Johann Steynberg.

However, that is not the purpose of this article. Crooks spawn left, right, and center. In and out of the crypto sphere.

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

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

Until the rise of bitcoin, gold was initially considered a safe store of value. For most people today, gold is still used for the above. Gold is a safe haven asset, protecting capital in volatile markets and protecting your money against a decline in other assets i.e. stocks and bonds.

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

But in fact, that was not the case. Here’s why :

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

bitcoins; S&P 500 (stocks); and gold price.

During this period, the largest drawdown on the three assets was seen in bitcoin. This drawdown was 75% from the bitcoin price peak in November 2021. So much the worse for a safe-haven asset? Currently, bitcoin is still down 75% from the price peak of $64,000.

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

The purpose of a safe asset is to protect investors against market volatility, and if the macro economy is shaken, to still provide some form of foundation in your portfolio, which bitcoin never did.

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

Besides the volatile nature of crypto, there is the fact that it is still unregulated in South Africa and many other countries. This makes any crypto investment even more vulnerable to fraudsters and scammers, as the investor has no feet to stand on when you have been taken for a ride.

Crypto investments should definitely be done with extreme caution and the right advice when possible. Crypto investments are NOT safe haven assets. Don’t fall into this trap, as it could result in significant capital losses that, in most cases, will never be recovered.

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