Kansas City Federal Reserve’s New Report Quashes Bitcoin’s Digital Gold Narrative


Bitcoin has been called a digital equivalent of gold for as long as it has existed mainly because many Bitcoin proponents believe it is a safe haven asset that possesses similar properties to gold. While gold has been in existence for thousands of years, its scarcity mixed with high demand makes it a perfect hedge in turbulent times (or does it). On the other hand, Bitcoin even though just a decade old has managed to gain a similar status among its supporters who believe its limited supply combined with decentralization makes it a perfect hedging asset in times of financial troubles.

The proponents on both sides have been trying to prove their asset as superior to one another, however, a recent study released by the Federal Reserve’s Kansas City branch suggest Bitcoin at the moment is too small and new to be deemed as a safe haven. The report quashed all the claims that Bitcoin is similar to gold and believes that Bitcoin needs to prove its worth, in the long run, to be called a safe haven.

The report published last week was largely ignored by the crypto community which is understandable given the report not only shut down the safe-haven asset claims but also called Bitcoin more of a risk asset.

Bitcoin has More Co-Relation With S&P 500 During Financial Turmoils Than Gold

The report compared the price movement and behavior of Bitcoin in terms of the financial crisis with a 10-year time frame and found that in time of stress, Bitcoin has shown more correlation with the S&P 500 to a level of 5%.

The study took in Bloomberg data into consideration and noted that treasury bonds and gold had a negative correlation with the S&P 500 during the time of financial stress, thus suggesting Bitcoin is yet to achieve the safe-haven status.

Periods of Financial Stress

Note: Gray bars indicate periods of stress.
Sources: Federal Reserve Bank of Kansas City and Bloomberg

Although the study in no means indicate that Bitcoin would never achieve the safe-haven status, in fact, the study concluded that in the given 10-year time frame, government bonds showed the highest level of the safe-haven property while gold showed partial signs of being a hedge fund in bad financial scenarios while Bitcoin was getting there.

In Fact, Bloomberg’s Crypto Outlook for the month of April suggested that Bitcoin has started to trade like Gold and is maturing as an asset class attracting numerous traditional institutional investors to its ecosystem. Some of the factors that contributed to this find were increasing futures market volume (suggesting greater institutional interest), decreasing volatility and increasing the correlation between gold and Bitcoin.

Block Reward Halving Could Push Bitcoin’s Case For Digital Gold Further

One of the key factors that make Gold a safe haven asset is its scarcity and stability, and many believe Bitocin is well on its course to mirror those properties with the upcoming Block Reward Halving. Block Reward Halving would make the production of Bitcoin even scarer where the per block reward would be reduced from the current 12.5 BTC to 6.25 BTC. At present Bitcoin’s volatility`is a big challenge for its digital gold status which is almost double what most of the fiat currencies of the world.

Block Reward Halving will also push Bitcoin’s Stock to Flow (a metric to measure the scarcity of an asset) value ahead of Gold. Currently Gold stands at the top followed by Bitcoin and then other precious metals, however, the fact that within 10 years of its existence it is set to overtake gold in itself is a big statement on how Bitcoin will be the hedging asset for the future generations.

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