Bitcoin and Coronavirus: Why the “Digital Gold” Debate is Misguided


  • Data on Bitcoin’s performance during the advent of the coronavirus (COVID-19) misleadingly rekindled the debate of whether or not Bitcoin is “digital gold,” a decentralized store of value and safe-haven asset.
  • BTC’s behavior during the onset of COVID-19 was not evidence for or against this thesis; rather, BTC’s behavior may suggest that financial contagion “infected” both Bitcoin and gold, among other markets.
  • The biggest lesson for BTC from the COVID-19 outbreak so far is that it is functioning as a financial asset, and a risk asset at that — but that doesn’t necessarily mean it isn’t a store of value.

As the world was still actively working to understand the extent, ramifications, and possible solutions regarding the coronavirus (COVID-19) pandemic, crypto market participants witnessed a phenomenon that defies what many expect of Bitcoin: as the S&P 500 plunged, the price of BTC plunged with it.

Between March 4th and March 16th, the S&P 500 fell just over 21%, from $3098.49 to $2443.35, while BTC fell just over 44%, from $8755.47 to $4896.86.

These are the largest single-day losses fit that both BTC and the S&P 500 have seen over the last three years:

These coinciding S&P 500 and BTC losses have led many public figures and media outlets to either decry or reevaluate the popular narrative that Bitcoin is poised to function as “digital gold”: a store of value, like gold, that may retain its value during periods of broader financial downturn.

But you can’t understand the full story by looking at only part of the data. A different picture of BTC emerges when you compare its performance with gold’s over the same period:

Even though gold wasn’t as volatile as BTC, both showed losses during the first half of March amidst COVID-19 uncertainty — and these were still the largest single-day losses that gold has experienced in the last 3 years.

At first glance, this constellation of data could seem confusing to a trader: do the synchronized losses in BTC and S&P 500 mean BTC isn’t “digital gold” after all? How do we reconcile that with the fact that gold itself also showed losses during this period?

The truth is that these seemingly incompatible data actually demonstrate that the debate over whether Bitcoin is digital gold is the wrong debate to be having: in this early chapter of Bitcoin’s history, we aren’t seeing evidence of its “true function.” Rather, we’re witnessing Bitcoin’s participation in the financial contagion: during times of severe financial stress when correlations across almost all asset classes move towards 1, there is typically a flight toward liquidity, with investors moving to cash and deleveraging in a completely risk-off environment. This time around, BTC appears to be part of that movement, which does have interesting conclusions for its status as a financial asset — but not about any question of whether it’s digital gold.

To understand what that means and why it’s the case, we have to understand what black swan events are and how those events can bring about market movements we wouldn’t ordinarily expect to observe.

Pandemic Breeds Contagion

Popularized by Nassim Nicholas Taleb but finding its origins as early as , the term “black swan event” refers to a highly impactful event that is so rare that it is effectively impossible to accurately, reliably predict. The classic example of a black swan in recent history is the U.S. subprime mortgage crisis, which led to the Great Recession in 2008.

A more recent example of a black swan event may be the coronavirus pandemic.

Between mass quarantines, “social distancing,” shutdowns, and travel bans, the sweeping impact of this kind of pandemic is a classic case of the kind of global, unpredictable event that can theoretically throw a plurality of markets into uncertainty. Not only was the advent of COVID-19 unexpected, but it also remains unclear how long we will be coping with its impacts — only further stoking uncertain market conditions with each passing day.

In the crypto world, Bitcoin reached its highest volatility levels in almost 8 months on March 12th (UTC). That volatility kicked off when President Trump announced a ban on U.S. travel to Europe:

A half-hour later,  announced that the NBA was suspending their season:

A minute-by-minute graph of BTC’s 24-hour volatility shows how quickly the crypto asset became more volatile as these news stories broke and sank in, illustrations of how thoroughly COVID-19 would impact industries as massive as travel and major league sports:

Not only was the COVID-19 news’ impact on BTC volatility visible minute-by-minute: if we zoom out to a 6-month chart, we see that this was part of a ramp-up that’s brought BTC’s volatility to highs that we haven’t seen in well over half a year. BTC’s previous 30-day historical volatility high was 72.33% on November 21st, 2019, compared to 111.38% on March 16th, 2020.

The crypto market is far from alone in this increased volatility: in the last month of COVID-19 spreading and radically altering many aspects of markets and daily life, the VIX — the CBOE’s “fear” index that measures implied volatility in the stock market based on S&P 500 options — has seen a run-up in value since late February 2020, indicating the extremely volatile conditions that traditional markets have seen right alongside crypto markets.

Historical chart of VIX daily values in the last 6 months. Source: Macrotrends.

In fact, these are the highest values that the VIX has registered since the 2008 financial crisis:

Historical chart of VIX daily values from 1990 through March 2020. Source: Macrotrends.

Almost exactly 22 hours after Trump’s address from the White House announcing the travel ban, the price of BTC fell 30.8%, from $5735.25 to $3969.32. The BTC volatility and trading volume were so beyond the norm that several crypto exchanges — most notably, the leveraged trading platform BitMEX — experienced full trading outages for extended periods of time. ( remained fully operational during this time despite seeing 30 times its usual trading volume.)

This may have been at least partly related to mass market liquations that we saw in conjunction with news about the extent to which COVID-19 would be impacting industries, travel, and the global workforce: on March 12th, BTC futures open interest was cut almost in half, from about $3.75 billion to about $2 billion.

Graph of BTC open interest, March 2nd — March 16th. Source: Skew.

The major contraction of open interest could have potentially led to the dip in the underlying price of BTC — a trend that appears to have been the order of the day in many markets amidst the severe uncertainty surrounding COVID-19. In particular, since a significant amount of this open interest is leveraged, the amount of leverage that got sucked out is substantial — which, in turn, could have led to liquidations exacerbating selling pressure and volatility.

All of this is consistent with the phenomenon of financial contagion — not to be confused with the viral contagion that’s sweeping the globe. The precise nature of ‘financial contagion’ is the subject of significant academic debate, but roughly speaking, it describes the tendency of sharp, unexpected market downturns to propagate from one market to another. Simply put, when a black swan event makes things go bad in an unexpected way on a global scale, correlations between a multitude of asset classes can go to 1 as they decline in unison.

A modern example of financial contagion is the Great Recession of 2008: following the collapse of the housing market, global markets that are typically less than perfectly correlated collapsed in a highly correlated fashion, as shown by the precipitous collapses in global imports and exports on the below charts.

Data showing the contagion effect in global import and export markets during the 2008 recession. Source: Anderson (2009), in The Impact of the Financial Crisis on Emerging Asia, Morris Goldstein and Daniel Xie.

Why does contagion happen? Conventional wisdom tells us that in times of extreme market uncertainty, investors may be completely risk-off, moving into cash from virtually all other markets. This move to cash can even lead to liquidation of traditionally less risky assets like gold in the short run — in the 2008 financial crisis, for instance, gold’s price initially fell with the prices of equities and other assets before .

Unwinding leverage only exacerbates the effects of contagion: extreme downward movements in the market can lead to major deleveraging, which, in turn, can trigger liquidations and margin calls, both forcing down the price of the underlying assets and prompting the sale of other assets to cover margin.

When movement into cash and unwinding leverage happen in tandem, the result can be a snowball effect that pushes asset prices down and encourages asset liquidation, cascading across markets and leading typically uncorrelated markets to fall steeply in unison.

The market’s behavior at the start of the COVID-19 outbreak appeared to show signs of these common causes of contagion. The correlations between gold, the S&P 500, and BTC all moved towards 1, each significantly more positive than their typical range in the last 4 and a half months.

On March 19th, Bloomberg  that $7.3 billion flowed out from bond funds in the previous week, while “total assets in government money-market funds rose to an all-time high of $3.09 trillion in the week ended March 18, according to Investment Company Institute data that stretches back to 2007.” This movement, in conjunction with the movement of market correlations towards 1, suggests that we may simply have witnessed investors moving to cash in a completely risk-off environment.

We also have seen the major unwinding of leverage that’s characteristic of contagion.  to Nomura Managing Director Charlie McElligott, as of March 19th, risk parity equity and bonds exposure levels are both in the 0.2 percentile looking back through 2011, suggesting that funds are deleveraging to historically low levels.

Breakdown of gross risk parity estimated exposure since 2011. Source: Nomura via SeekAlpha.

And remember, as we mentioned above, the Bitcoin market has seen similar, albeit less dramatic, deleveraging, with open interest getting cut almost in half over the first half of March.

Graph of BTC open interest, March 2nd — March 16th. Source: Skew.

What conclusions can we draw about BTC based on its apparent involvement in market contagion? We see two key insights:

  1. BTC is a financial asset. Over a decade after the creation of Bitcoin, there’s still debate in finance, given the nascency and relatively small footprint of BTC (by the standards of the finance sector, not the crypto sector), about whether BTC really qualifies as a financial asset. The fact that BTC appears to be adhering to the phenomenon of financial contagion in conjunction with other assets suggests that it may, in fact, be established as a financial asset at this point in its history.
  2. There’s another data point that BTC is a risk asset. BTC’s price fluctuations as global markets moved to risk-off provide more evidence that, at least at this point in its history, BTC is a risk asset. This is something to keep in mind regardless of whether or not one expects that BTC will be a stable, low-risk asset in the long-run: it’s perfectly compatible both to believe that BTC will ultimately be a store of value and to recognize that it’s currently a highly volatile risk asset.

What these data don’t show us, though — and, more to the point, what no short-term data said could conceivably show us is whether Bitcoin is destined to be a safe haven or not. The long-term question of Bitcoin’s utility can only be determined on longer time horizons; that’s why the very fact that we keep reigniting the “digital gold debate” at every news cycle is harming the discourse around Bitcoin and crypto more broadly.

The Big Picture: Bitcoin is in Its Early Days

Some crypto pundits seem eager to see macroeconomic movements as decisive proof or disproof of whatever Bitcoin narrative is trending during that particular week. So, of course, when we’re witnessing a major economic downturn and gold itself appears to be suffering, it’s no surprise that so many have been arguing over whether Bitcoin is truly ready to function as digital gold. But that kind of debate belies the fact that Bitcoin is still a young asset, and there simply aren’t enough data yet to determine with statistical significance whether BTC’s movements during the COVID-19 pandemic are even outside its normal fluctuations.

It’s true that Bitcoin is over a decade old, which is a huge milestone — but that’s also a very short history in terms of macroeconomic cycles. In many ways, Bitcoin was born as a direct response to the last financial crises, to the point that a relevant headline from The Times was literally coded into the first block of the blockchain: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

Raw hex version of Bitcoin’s first block, including a Times headline about a second bank bailout. Source.

This contrasts sharply with an established safe-haven asset like gold itself, for which we have hard performance data during many financial downturns. GoldSilver’s senior analyst, Jeff Clark, indirectly  the significance of that difference by conducting a kind of analysis on gold and silver that simply isn’t yet possible with Bitcoin: a look at their returns during the eight largest downturns in the S&P 500 since 1976.

Chart showing the returns of gold and silver during the eight largest downturns in the S&P 500 since 1976 at the time of the analysis’ publication. Source.

We’ll need more historical data on Bitcoin’s performance before we can really understand if its recent behavior is characteristic or uncharacteristic of its nature as an asset class — and, consequently, it’s far too early to settle the question of whether it’s “digital gold.” It’s true that the cascading downturn of BTC and gold, when viewed in conjunction with movement into cash and unwinding leverage, appear to be symptoms of financial contagion; it’s also true that the built-in scarcity and censorship-resistance of BTC may make it seem especially good at holding value in the face of renewed QE; it’s also true that, even though BTC hasn’t seen this level of volatility in over half a year, it’s been this volatile (and even more volatile) many times before. This plurality of data could be used to tell virtually any story about the macroeconomic function of Bitcoin — and that’s precisely why we should be focusing solely on the long-term data and not on distracting and misleading debates over whether Bitcon is digital gold.

The good news is that the store of Bitcoin data is growing more robust literally every minute, and even though it’s premature to dub Bitcoin digital gold or not digital gold, this is an exciting moment for Bitcoin that will provide key data about one of its original use-cases: in many ways, current market conditions may end up being a kind of proving ground to see whether Bitcoin can really alleviate some of the pain points of modern economic policy.

Time will tell where Bitcoin is best suited to live in this evolving macroeconomic landscape — and in the meanwhile, for those who want to trade on BTC’s volatility, there’s no better platform to capture edge than .

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