Is It a Store of Value or an Investment... Bitcoin, What Is Your True Identity?

Sharp Drop in Ruble Value
Bitcoin Price Soars
Previously Moved Opposite to Gold Price

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Lee Jung-yoon] Until November last year, the representative cryptocurrency Bitcoin was recognized as a hedge against inflation. It was also called "digital gold," but due to its high volatility, it still occupied a position somewhere between investment and speculation. However, recently, Bitcoin has attracted attention again as it functions as a store of value.

After the COVID-19 crisis triggered an economic downturn, Bitcoin was regarded among its supporters as an alternative to gold. It rapidly emerged as a means to avoid uncertainty and inflation. The rise in Bitcoin prices during the four consecutive months of increase in the U.S. Consumer Price Index (CPI) supported this claim. On the 5th of last month, Dan Egan, Director of Behavioral Finance at Betterment, said in an interview with CNBC, "In the early days, Bitcoin was seen as a channel to suddenly accumulate wealth, but recently it is closer to a digital gold asset that provides a means to avoid risk in the market."

However, this claim lost momentum after the outbreak of the Ukraine crisis. Bitcoin prices, which had been around 50 million KRW until the 16th of last month, fell by 7.36% on the 17th when news spread that Russia might invade Ukraine.

But as demand from Russians who viewed Bitcoin as a store of value surged, Bitcoin has once again drawn attention. According to the cryptocurrency exchange Upbit on the 2nd, Bitcoin's price, which was 46.69 million KRW around 10 PM on the 28th of last month, soared to 53.64 million KRW by midnight. This was a 14.88% increase in just two hours.

After the U.S. and Western European countries decided to exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment network, the value of the ruble plummeted by nearly 30%. Binance, the world's largest exchange, announced it would not freeze Russian cryptocurrency accounts, and the difficulty of sanctioning wallets storing cryptocurrencies also influenced the increase in demand from Russians.

As demand for Bitcoin surged, it exhibited characteristics similar to safe-haven assets. It became a means to avoid the ruble's sharp depreciation and rapid inflation. It functioned as a store of value, one of the features of safe assets. Lea Vald, CEO of the U.S. asset management firm Valkyrie Fund, said regarding the Bitcoin price surge, "In the past, there was a strong redemption relationship between the liquidation of traditional assets and the decline of digital assets," but added, "However, we are not currently seeing this situation, and the important issue is to observe whether this pattern continues. If so, Bitcoin and other cryptocurrencies could reach a turning point to become mainstream."

Despite these phenomena, experts explain that it is difficult to regard Bitcoin as a safe-haven asset. Professor Hong Ki-hoon of the Department of Business Administration at Hongik University said, "Since gold and other safe assets could not be purchased, it seems that Bitcoin was bought as the only accessible alternative," adding, "If Bitcoin were a safe asset, its price would have risen alongside gold prices after the Ukraine crisis."

In fact, until the surge in demand driven by Russian buyers, Bitcoin prices showed a trend opposite to gold prices. According to the Korea Exchange, the price of gold 99.99K per gram was 70,360 KRW on the 11th of last month. It showed an upward trend, rising to 74,360 KRW on the 24th and recording 74,520 KRW as of 9 AM that day. During the same period, Bitcoin prices on Upbit at 3:30 PM (the same time as the Korea Exchange's gold 99.99K closing price determination) fell from 52.73 million KRW to 43.08 million KRW on the 24th, then slightly rose to 46.62 million KRW on the 28th.

Furthermore, until the surge, Bitcoin had shown synchronization with the U.S. stock market, especially the tech-heavy Nasdaq index. Even after the outbreak of the Ukraine crisis, Bitcoin moved in a trend similar to the relatively volatile Nasdaq rather than gold, leading to opinions that it is difficult to view Bitcoin as a safe-haven asset. The Nasdaq index recorded 13,791.15 on the 11th of last month (local time), rose to 14,124.09, but fell to 13,037.49 on the 23rd, a day before Russia's invasion of Ukraine. It closed at 13,532.46 on the 1st.

Professor Andonghyun of the Department of Economics at Seoul National University said, "Bitcoin and gold share similarities in that they are assets with limited supply," but added, "The increase in Bitcoin demand in Russia is due to the special situation of economic sanctions, and after the Ukraine crisis, Bitcoin fell in synchronization with U.S. stock prices, so it is difficult to consider it a safe-haven asset."

This content was produced with the assistance of AI translation services.