Bitcoin advocates have stressed for some time that the world’s biggest digital currency can hedge against inflation and declines by stocks and bonds. But that hasn’t happened this year, as stocks, bonds and bitcoin have dropped in tandem.
Year to date, the S&P 500 has suffered a 15% drop in total return, the Bloomberg U.S. Aggregate Bond Index posted a negative return of 10%, and bitcoin has plunged 37% to $30,029.
That’s obviously not much of a hedge. The three-month correlation between digital currencies bitcoin and ether and major U.S. stock indices touched a record last week, according to Dow Jones Market Data, as cited by The Wall Street Journal. The correlation reached 0.67 to 0.78, with 1 representing complete positive correlation and 0 representing no correlation.
Bitcoin recently has correlated strongly with inflation, too. Consumer prices soared 8.3% in the 12 months through April. The cryptocurrency slid 28% during that period.
Bitcoin proponents have posited that the currency is a store of value. But bitcoin at this point looks more like a store of speculation.
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Not a Medium of Exchange
Bitcoin doesn’t function like a true currency, which is a medium of exchange for goods and services. Bitcoin isn’t heavily utilized in legitimate commerce, as its volatility makes it difficult for both buyers and sellers to value their transactions in dollars.
In addition, heavy usage of bitcoin has made transactions in the currency slow, rebutting the argument of bitcoin enthusiasts that the cryptocurrency increases efficiency of financial transactions.
To be sure, bitcoin does seem to be here to stay. Both individual and institutional investors are widely involved in the bitcoin markets. And plenty of legitimate financial institutions are too. Bitcoin had a market capitalization of $572 billion as of May 17.
One possible scenario for digital currencies in the U.S. is that the government creates an official digital dollar to be overseen by the Fed. This digital currency might then be used extensively for commerce.
That’s not a big stretch, as many of our transactions already are purely digital — think credit cards. In that case, bitcoin might simply retain its status as a vehicle for speculation.
