Bitcoin not the new digital gold- Simonis
The resisting censorship requirement might not apply to Bitcoin as governments can decide to regulate it or outright ban any financial exposure to Bitcoin.
PHILLEPUS UUSIKU
Despite the spike in the price of Bitcoin by 46% during 2021 and a drop in the price of gold, Simonis Storm (SS) is still convinced that Bitcoin is not the new digital gold.
The price of Bitcoin starting 2021 at US$31 702, ending with US$46 333 and reaching an all-time high of US$67 734 on 9 November 2021, according to a Simonis Storm report.
Gold prices have decreased by 4% in 2021, its biggest decline since 2015 in US dollar terms. This has sparked renewed interest in cryptocurrencies and its investment thesis and since the start of 2022, analysts are now assessing claims that Bitcoin is a new digital gold.
In response to the low interest rate environment, global portfolios made larger allocations to riskier and less liquid alternatives, with Bitcoin being one of the top alternative choices.
“We have also seen more countries announcing their intentions on building a national digital currency network throughout 2021, adding to the hype of Bitcoin and other cryptocurrencies,” SS pointed out.
According to Simonis, there are similarities as they both don’t pay dividends or interest, and are deemed to have value in the long run if there is a fiat currency meltdown. “We are not convinced that Bitcoin is being treated like gold,” SS said.
To put it in context, SS answered two key questions, whether Bitcoin is a new safe haven asset as well as if it does have store of value.
A safe haven asset is a type of investment that is expected to retain or increase in value during times of market turbulence, SS cited Investopedia in the report. Because of its volatile nature, Bitcoin hardly retains or preserves value in times when stock markets are volatile, SS pointed out.
Political, financial and inflation risks such as war, economic downturns and rising prices also poses a threat to Bitcoin.
When looking at the Arab Springs uprisings in the Middle East and revolutions in North Africa during 2011, both Bitcoin and gold provided positive real returns, the report reads.
“These were however still early days of Bitcoin’s existence and in the absence of major wars declared in recent years, we cannot fully assess the political hedge abilities of Bitcoin. However, gold is a known political hedge when looking at real returns during the Iran-Iraq wars,” SS said.
“More data is needed to analyse Bitcoin in recessionary periods, but we believe that Bitcoin is not a hedge against financial risk,” SS added.
STORE OF VALUE
A store of value is essentially an asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without deteriorating in value.
To answer the store of value question, SS outlined six out of eight requirements that Bitcoin can fulfil. Namely, durable, portable, fungible, verifiable, divisible and rare.
With regard to the seventh requirement which is established history, SS says Bitcoin has been in place since mid-2010 and some might argue this is not an extensive period of time, however, 10 years seems sufficient to gauge a medium-term view on Bitcoin.
The last requirement of resisting censorship might not apply to Bitcoin as governments can decide to regulate it or outright ban any financial exposure to Bitcoin, SS said. Gold also does not satisfy the censorship resistance requirement.
Empirical study results from academia largely provide evidence that Bitcoin does not act as a safe haven or hedging asset in both developed and emerging market stock markets, SS pointed out.
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“We do not have sufficient data on Bitcoin as it only in existence for eleven years, to confidently say that Bitcoin holds a store of value, together with its high levels of volatility which can distort the data in assessing a medium-term relationship with different asset classes. We do not advocate the use of crypto’s as a hedge against inflation or market volatility,” SS said.
Some argue that gold is currently stuck between being more reliable and safer, compared to cryptocurrencies being more exciting and potentially higher returning.
Simonis is of the view that gold still has relevance as a hedging asset, especially against political and financial risk, its recent lacklustre performance does not completely invalidate it. However, a long-term view is required on gold’s hedging abilities. High liquidity supported stock markets to be an inflation hedge in the midst of observing historically high inflation rates in developed countries in 2021, with no need to hide in gold.
“Regulatory concerns, frequent occurrence of cyber-crimes and unintended uses of cryptocurrencies deter this “asset class” from our investment philosophy and we see these risks growing in the future.”
Moreover, block chain technology is here to stay, however Bitcoin does not necessarily have to be the universally adopted cryptocurrency used to facilitate daily transactions, it could well be any other coin. However, given its market size, Bitcoin’s irrelevance can likely not be ruled out, SS said.
“With that said, any high-risk investor or speculator who wants investment exposure to cryptocurrencies, we would advocate for a cryptocurrency Exchange Traded Fund (ETF) which provides diversification amongst numerous coins.”
“We further caution that you invest money that you can afford to lose and limit your exposure to between 1% and 2% of your overall wealth excluding your primary residence in cryptocurrency investments,” SS [email protected]
Despite the spike in the price of Bitcoin by 46% during 2021 and a drop in the price of gold, Simonis Storm (SS) is still convinced that Bitcoin is not the new digital gold.
The price of Bitcoin starting 2021 at US$31 702, ending with US$46 333 and reaching an all-time high of US$67 734 on 9 November 2021, according to a Simonis Storm report.
Gold prices have decreased by 4% in 2021, its biggest decline since 2015 in US dollar terms. This has sparked renewed interest in cryptocurrencies and its investment thesis and since the start of 2022, analysts are now assessing claims that Bitcoin is a new digital gold.
In response to the low interest rate environment, global portfolios made larger allocations to riskier and less liquid alternatives, with Bitcoin being one of the top alternative choices.
“We have also seen more countries announcing their intentions on building a national digital currency network throughout 2021, adding to the hype of Bitcoin and other cryptocurrencies,” SS pointed out.
According to Simonis, there are similarities as they both don’t pay dividends or interest, and are deemed to have value in the long run if there is a fiat currency meltdown. “We are not convinced that Bitcoin is being treated like gold,” SS said.
To put it in context, SS answered two key questions, whether Bitcoin is a new safe haven asset as well as if it does have store of value.
A safe haven asset is a type of investment that is expected to retain or increase in value during times of market turbulence, SS cited Investopedia in the report. Because of its volatile nature, Bitcoin hardly retains or preserves value in times when stock markets are volatile, SS pointed out.
Political, financial and inflation risks such as war, economic downturns and rising prices also poses a threat to Bitcoin.
When looking at the Arab Springs uprisings in the Middle East and revolutions in North Africa during 2011, both Bitcoin and gold provided positive real returns, the report reads.
“These were however still early days of Bitcoin’s existence and in the absence of major wars declared in recent years, we cannot fully assess the political hedge abilities of Bitcoin. However, gold is a known political hedge when looking at real returns during the Iran-Iraq wars,” SS said.
“More data is needed to analyse Bitcoin in recessionary periods, but we believe that Bitcoin is not a hedge against financial risk,” SS added.
STORE OF VALUE
A store of value is essentially an asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without deteriorating in value.
To answer the store of value question, SS outlined six out of eight requirements that Bitcoin can fulfil. Namely, durable, portable, fungible, verifiable, divisible and rare.
With regard to the seventh requirement which is established history, SS says Bitcoin has been in place since mid-2010 and some might argue this is not an extensive period of time, however, 10 years seems sufficient to gauge a medium-term view on Bitcoin.
The last requirement of resisting censorship might not apply to Bitcoin as governments can decide to regulate it or outright ban any financial exposure to Bitcoin, SS said. Gold also does not satisfy the censorship resistance requirement.
Empirical study results from academia largely provide evidence that Bitcoin does not act as a safe haven or hedging asset in both developed and emerging market stock markets, SS pointed out.
RECOMMENDATIONS
“We do not have sufficient data on Bitcoin as it only in existence for eleven years, to confidently say that Bitcoin holds a store of value, together with its high levels of volatility which can distort the data in assessing a medium-term relationship with different asset classes. We do not advocate the use of crypto’s as a hedge against inflation or market volatility,” SS said.
Some argue that gold is currently stuck between being more reliable and safer, compared to cryptocurrencies being more exciting and potentially higher returning.
Simonis is of the view that gold still has relevance as a hedging asset, especially against political and financial risk, its recent lacklustre performance does not completely invalidate it. However, a long-term view is required on gold’s hedging abilities. High liquidity supported stock markets to be an inflation hedge in the midst of observing historically high inflation rates in developed countries in 2021, with no need to hide in gold.
“Regulatory concerns, frequent occurrence of cyber-crimes and unintended uses of cryptocurrencies deter this “asset class” from our investment philosophy and we see these risks growing in the future.”
Moreover, block chain technology is here to stay, however Bitcoin does not necessarily have to be the universally adopted cryptocurrency used to facilitate daily transactions, it could well be any other coin. However, given its market size, Bitcoin’s irrelevance can likely not be ruled out, SS said.
“With that said, any high-risk investor or speculator who wants investment exposure to cryptocurrencies, we would advocate for a cryptocurrency Exchange Traded Fund (ETF) which provides diversification amongst numerous coins.”
“We further caution that you invest money that you can afford to lose and limit your exposure to between 1% and 2% of your overall wealth excluding your primary residence in cryptocurrency investments,” SS [email protected]
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