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Breaking the “Hedge” Illusion: How Investors Dumped Bitcoin While Rockets Flew Over Israel

Bitcoin has once again failed to prove its ‘hedge against all troubles’ capability

Recent conflicts in the Middle East have led to divergent market reactions between PAX Gold and Bitcoin, prompting a reassessment of Bitcoin's utility as a geopolitical hedge.

Key takeaways:

  • PAX Gold reached an all-time high of $2,855 amidst rising geopolitical tensions, while Bitcoin fell sharply by over 7%.
  • Market analysts debate Bitcoin's effectiveness as a safe-haven asset compared to traditional and digital gold.

Over the weekend, following an increase in geopolitical tensions due to an Iranian drone and missile attack on Israeli targets, the cryptocurrency market saw significant fluctuations. PAX Gold, a gold-backed digital asset by Paxos, spiked to an all-time high of $2,855 on April 13, as reported by CoinGecko. In contrast, Bitcoin experienced a considerable downturn, dropping $5,000 from a high of over $67,500 to around $62,700, marking a 7.5% decrease within hours.

Bob Elliott, the co-founder and CEO of Unlimited Funds and a former executive at Bridgewater, remarked on the market's reaction, stating: 

“Bitcoin may be many things, but it is not a geopolitical hedge.” 

His comment was made in light of Bitcoin’s performance, which he described as showing a 

“near-perfect negative correlation over the last day to PAXG.”

Analysis of Bitcoin's role as a geopolitical hedge

Despite the initial surge, PAX Gold was unable to maintain its peak, retracting to a price level around $2,376, closely tied to the spot gold price, which also peaked at $2,400 per ounce last week. This volatility highlights the challenges and nuances of using digital assets as hedges against geopolitical risks.

The liquidity of PAX Gold, which saw a daily trading volume of just $36 million, was pointed out by critics as a potential issue when comparing it to more heavily traded cryptocurrencies. Glassnode analyst "Checkmatey" criticized those using PAX Gold’s price spike to undermine Bitcoin, labeling them as “unserious market commentators.”

Bob Elliott further discussed Bitcoin's historical market behavior during geopolitical crises, including last year's October 7 Hamas attack on Israel and the Russian invasion of Ukraine in February 2022. He observed that Bitcoin often does not perform as expected during these events, stating: 

“These correlations look to be getting more negative over time... BTC largely traded randomly in a relatively tight range in the lead-up and following the invasion,” 

and concluding 

“Along the geopolitical dimension, it's pretty conclusive BTC is not ‘digital gold.’”

As of early trading on Monday, April 15, Bitcoin had shown signs of recovery, climbing back to over $66,500, yet the debate over its status as a safe-haven asset continues.