Once a potential rival of gold as a safe-haven store of value, bitcoin seems to have lost its luster among institutional investors after a volatile fall from all-time highs.
On June 2, gold futures climbed above $1,900 per ounce for the first time since Jan. 7. Gold has rallied over 13% since March 30.
Meanwhile, bitcoin has fallen from a record high of about $63,110 on April 14 to nearly half that value at about $34,616 on May 29, a drop of 45%. The cryptocurrency has seen significant volatility during that time. On April 16, for example, bitcoin reached nearly $63,595 and then fell below $52,830 on April 18, a 17% drop in a weekend.
With inflation climbing, investors continue to buy gold as a hedge against rising prices, despite the growing popularity of bitcoin and other cryptocurrencies, market analysts said.
"To be a reputable store of value, an asset can't drop 20% or 30% over a weekend," said Tom Essaye, a trader and founder of research firm The Sevens Report, in an interview.
Bitcoin's value has plummeted due to multiple factors, including a warning from The People's Bank of China against using digital currencies, a crackdown by China on "mining" bitcoin, Tesla Inc. reversing plans to accept the cryptocurrency as payment for its electric vehicles and potential stricter rules and oversight from U.S. regulators.
In a May 20 video address, Federal Reserve Chairman Jerome Powell said government regulation and oversight of cryptocurrencies should include "paying attention to private-sector payments innovators who are not within the traditional regulatory arrangements applied to banks, investment firms, and other financial intermediaries."
Questions about bitcoin's future have compelled institutional investors to move away from the cryptocurrency, said Nikolaos Panigirtzoglou, a managing director at JP Morgan & Chase Co., in a May 18 note.
"Over the past month, bitcoin futures markets experienced their steepest and more sustained liquidation since the bitcoin ascent started last October," Panigirtzoglou wrote.
CME Group's Bitcoin futures contract, which launched in December 2017, reached a record average daily volume of 87,744 bitcoin equivalents in January 2021. The contract serves as a daily reference rate of the U.S. dollar price of bitcoin, according to CME.
Volume fell roughly 47% in April to 46,681 equivalents. In May, the average daily volume was at 58,066 bitcoin equivalents, down about 34% from the January record high, CME reported on June 1.
The declines in price and trading volume show that the cryptocurrency is an insufficient store of value compared to gold, market watchers said.
Gold established its store-of-value "at the dawn of recorded history" and retains that role even as it no longer backs national currencies, said John Butler, a former managing director at Deutsche Bank and Lehman Brothers and now an independent consultant for
"Bitcoin, by contrast, is more of a 'monetary experiment' using a young technology — blockchain — which may someday or may never establish store-of-value properties. It certainly hasn't yet, as demonstrated by recent price action," Butler said in an interview.
The experimental nature of bitcoin is likely to keep the cryptocurrency's price unstable relative to gold, said Patrick Leary, chief market strategist at Incapital.
"Investors should expect more volatility from cryptocurrencies, as regulations are still catching up to the market and developments are likely to create excess volatility," Leary wrote in a May 20 note.
Bitcoin and gold can be attractive to the same type of investors, according to Essaye of The Sevens Report. These investors typically view purchases of gold and cryptocurrencies not simply as investments, but as "a protest of sorts" against governments and financial systems run by central banks, Essaye said. Bitcoin, which began use in 2009, is a decentralized currency exchanged between users through a network without government or private sector intermediaries.
But while the performances of gold and bitcoin may be related, Essaye said bitcoin's volatility keeps it from being a true store of value.
"It needs to become a much more liquid and populated market so the volatility will be reduced," Essaye said. "Additionally, there needs to be some regulatory clarity that it will be more widely accepted as a cash alternative — something I think is very unlikely."
While gold has a centuries-long track record and bitcoin has numerous hurdles to overcome, such as price volatility, the cryptocurrency may still rival gold in terms of "real-world utility," said Hershita Rawat, a senior research analyst with AB Bernstein.
"Bitcoin network is 24x7, easily transcends borders, near-instantaneous, and resists censorship," Rawat wrote in a May 18 note. "The implications of this is that bitcoin can more easily be used as a store of value in any part of [the] world (especially in countries with unstable fiat currencies) and is very liquid."