Donald Trump has described bitcoin as “digital gold”. Events of the past four months say that, whatever else it might be, it isn’t that.
The plunge in bitcoin’s price last week underscored that it isn’t behaving as its boosters have described it. It’s not a hedge against inflation, nor geopolitical risks, nor volatility in traditional assets, nor currency debasement.
Gold, even though it, too, took a hit last week before regaining much of the ground it lost, does perform those roles and has demonstrated that by surging to record levels against a backdrop of volatility in global financial markets, including a depreciating US dollar, and the economic and geopolitical environments.
Bitcoin’s price peaked last October at more than $US126,000 ($178,000). It fell more than 22 per cent last week to trade below $US64,000, before recovering to now trade around $US68,650.
Gold, over that same period, has soared from just under $US4000 an ounce to just over $US5000 an ounce today. It has performed as one might expect in the circumstances.
Where bitcoin’s price has plunged more than 45 per cent since its peak, gold’s has risen 25 per cent in that same time period. There is, in effect no positive correlation between the two, which demolishes the notion that bitcoin, or cryptocurrencies more generally, are a hedge against risk.
The sell-off of bitcoin last week was part of the broader market meltdown triggered by Anthropic’s release of new artificial intelligence tools that appear to represent a significant threat to software-as-a-service companies.
At one point the S&P 500 had fallen more than 2.5 per cent and the more tech-laden Nasdaq index was down 4.5 per cent as fears that AI might cannibalise existing companies earlier than anticipated rose.
The performance of bitcoin last week would suggest that it is far more correlated – in a highly leveraged fashion – to equity markets, and technology stocks in particular, than more defensive assets. Unlike gold, it’s leveraged to “risk-on” environments rather than “risk-off” settings that favour gold.
The dramatic demonstration of bitcoin’s leverage to shifts in the risk environment highlights (a) its relatively scarcity and illiquidity in its primary market, given that only 21 million coins will ever be in circulation and (b) the growing liquidity in secondary, synthetic, markets as they became more institutionalised and cryptocurrencies more mainstream.
There has been a proliferation of exchange-traded funds and the development of derivative markets for bitcoin that have created a deeper market for trading in crypto and bitcoin in particular.
They have also, however, introduced leveraged and institutional trading strategies to a market that used to be quite unsophisticated. That could help explain the exaggerated swings in value.
Last week, for instance, one of the proffered explanations for the extent of the bitcoin meltdown was that a Hong Kong hedge fund with a big and leveraged out-of-the-money position in bitcoin derivatives, funded by cheap yen-denominated borrowings, was caught out by the steep fall in the price and the volatility of the yen and hit by margin calls and was forced to liquidate its position.
Whether that’s true or apocryphal, it highlights how combustible the combination of leverage, illiquidity and margin calls can be for crypto assets when volatility surges in financial markets.
The decline in bitcoin’s price, however, wasn’t a one-week phenomenon. It began in early October when the bullishness – euphoria even – that accompanied Donald Trump’s win in then presidential election in 2024 and drove bitcoin to record levels began to ebb.
Trump, once a crypto sceptic – he described it as a “scam against the US dollar” – became a convert after crypto billionaires helped fund his campaign (and his family piled into the crypto world, starting up a raft of crypto businesses that have greatly increased his wealth).
Trump declared that he would be the “bitcoin president” and the US would become the “crypto capital of the planet”.
He has created a crypto strategic reserve from crypto assets (an estimated 330,000 bitcoins) confiscated by US authorities.
Last year Congress passed the Genius Act, which provided a regulatory framework for stablecoins, and has the Clarity Act, which is a complementary bill that fills in some of the details, before it.
That latter piece of legislation, and the delays in enacting it, might have been a contributing factor to the post October trend in crypto prices that has wiped nearly $US2 trillion from the overall crypto market’s capitalisation.
On Tuesday, there was a meeting at the White House between promoters of stablecoins and bankers who have been wrangling for months over whether stablecoins should, or should not, be able to offer yields or other rewards.
The crypto companies say that yields are essential if they are to be competitive and drive user adoption.
Trump declared that he would be the ‘bitcoin president’ and the US would become the ‘crypto capital of the planet’.
The banks say they will, by offering yields the banks cannot match, drive deposits that are critical for their ability to lend into what is, compared to the banking sector, an effectively unregulated environment. On some estimates, more than $US6 trillion of deposits would be at risk.
The Trump administration is keen to see the US stablecoin sector flourish because, with a requirement that for every dollar of stablecoins there always has to be a dollar of safe assets – US Treasury securities are the most obvious – it would drive demand for US government debt and lower the government’s rapidly-rising interest costs.
Tuesday’s meeting – the second in a week – doesn’t appear to have resolved the impasse. The debate, however, highlights the potential for crypto, stablecoins in particular, to change and even destabilise banking systems if the regulatory framework isn’t designed intelligently.
The other influences on crypto prices since October might be Trump’s erratic deployment of tariffs, the kidnapping of Venezuela’s president, the threats to invade Greenland and the potential for another military action against Iran, all of which contribute to a risk-averse environment.
The assaults on the US Federal Reserve and its chairman, and Trump’s nomination of Kevin Warsh, who made his name as an inflation hawk, as the next chair of the Fed probably haven’t helped.
The lower interest rates promised by Trump and Warsh aren’t going to materialise if, in the process, they stiffen the resolve of the voting members of the Federal Open Market Committee to demonstrate their independence, and Warsh could easily revert to type once he gains the chair if the inflation rate remains stubbornly high.
His desire to shrink the Fed’s balance sheet, which would pull liquidity from the US system, would also be inimical to an asset class which, like equities, performs more strongly when there is a lot of liquidity in the system.
While there might be no singular explanation for why bitcoin’s price has been tumbling over the past four months, there are, therefore, a number of streams of risk within the environment that might have contributed to a sell-off that has made it clear that, whatever bitcoin might be, it isn’t digital gold.
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