Finance has evolved. It has been forced into the new age with technological advancements and innovation. One needs to look only at blockchain, web3, and the rise of cryptocurrency – made famous through industry leading token, Bitcoin (BTC) – to see proof of this.

Some have been drawn to tokens like Bitcoin as an alternative investment to the more stable and historically proven store of wealth of the original yellow valuable thing – gold – for the sake of a potentially higher return in the short run. However, these are objectively riskier investments.  

In this article, we will look into that objectivity and try to gain a solid understanding of how gold performs when the crypto market takes a downturn into the dreaded “Crypto Winter”. For the sake of consistency and ease, we will compare gold to Bitcoin – though, we are not  the first to do so.

What is a Crypto Winter?

A "crypto winter" is similar to a traditional bear market in finance – when the market takes a minimum of 20% downturn from the season’s highs (and remains there for what can feel like forever) triggered by reduced investor confidence, major negative market-related news, or key players in the industry closing down due to bankruptcy or caught doing something they really shouldn’t be doing.

One of the only differences that defines crypto winter is that there is no set percentage in the decline nor is it governed by anyone that would confirm the situation; rather, it is a general negative sentiment brought on by lower trading volumes and continued losses for at least three months.

The duration of crypto winters is virtually impossible to predict. The first bear market happened in 2011 and ended the same year, but the first winter occurred in Dec 2017 and lasted till Feb 2019. The most recent crypto winter started in 2022 after the TerraUSD, LUNA, FTX, and BlockFI crash which wiped out more than $1 trillion, and is reportedly still ongoing today in 2024. Historic timelines do not serve as a solid predictive method. We will discuss more about these winters shortly.
Writer’s note: (Also, yes, the fact that bears hibernate during winter has not passed over our heads).

Cryptocurrencies’ Volatility vs. Gold's Historical Stability

Cryptos have pushed the boundaries of innovation and unlocked new financial possibilities, but their jarring swings present significant risks for investors, especially when they’re as violent as crypto winters have historically been.

On the other side of that coin (pun intended) is gold. Gold has spent literal ages building its credibility as a safer, more stable asset, especially when markets have taken a hit. What we’ll see below is a comparison of the volatility of BTC and gold. BTC’s volatility, since it exists in a young market, is easily swayed, while gold lives in a mature and proven market allowing for assurances and trust when investing in it. In the interest of fairness, we will be transparent about the ups and downs of both Bitcoin and gold.

1. Gold as a Safe Haven Gold's role as a safe-haven asset is well-documented [can link our previous article]. During times of economic distress, financial crises, or geopolitical turmoil, investors flock to gold to preserve wealth. Unlike cryptocurrencies, which can experience dramatic price fluctuations within short periods, gold tends to exhibit stable price movements, offering security in uncertain times.
   
   For instance, during the 2008 Global Financial Crisis, gold prices rose by roughly 50% as global markets collapsed, reinforcing its status as a dependable hedge against financial turbulence.
   
   We read above that Bitcoin has had its major falls, but so has gold relatively speaking. In 2013, gold fell between 25%-30% mainly due to sentiment created by major banks, analysts, and brokers, but other reasons added to it.
   
   This fall, despite being the reportedly largest drop gold has experienced, still doesn’t compare to the heart-dropping figures Bitcoin reflected in its history. The largest Bitcoin crashes since 2011 were never less than 50% of its value.
   
   

2. Crypto Winter, 2018 The 2018 crypto winter demonstrated a perfect example of the performances of gold and cryptocurrencies.
   
   Bitcoin’s price dropped by over 80% from its all-time high because of a few reasons: Goldman Sachs abandoned its plans for a bitcoin trading desk, whales (large holders of an asset) sold 22.1k BTCs, and even more bitcoin was sent to Silk Road to be sold on the black market.
   
   This rolled in the winter clouds over the cryptocurrency market. The market saw massive selloffs leading to several exchanges and projects going bankrupt. Meanwhile, gold prices remained relatively stable, maintaining a range between $1,100 and $1,300 per ounce throughout 2018.
   
   

3. 2022: A New Crypto Winter As mentioned earlier, our most recent, and arguably still ongoing, crypto winter began in 2022. There are suspects of causing the drop, like rising interest rates or regulatory scrutiny, but most would agree that the collapse of major platforms such as FTX and Terra (among others) kicked off this winter in unprecedented fashion. During this crash, bitcoin lost over 60% of its value, and many altcoins fared even worse, with some becoming virtually worthless.
   
   (Although, around the time of writing this, BTC had hit its new all-time high in May at $73,750.07 and is currently hovering around $70k. So, speculation over whether or not the crypto winter is still ongoing is up for debate).
   
   In comparison to BTC, we saw that gold held steady, trading in a range between $1,700 and $1,900 per ounce.

Why Gold Outperforms Cryptocurrencies in Bear Markets

1. Intrinsic vs. Speculative One of the main reasons why gold outperforms cryptocurrencies in bear markets is its intrinsic value. Gold has long been used as a store of value and holds real, tangible value. Cryptocurrencies, on the other hand, derive their value largely from speculation, investor sentiment, the token’s utility, and the potential of underlying blockchain technologies.
   
   Those sources of value for cryptos, while sounding reassuring, still lack the backing of something with tangible value. One could go so far as to say what makes a good crypto is really strong marketing.
   
   During bear markets, when investor confidence wanes and speculative assets lose favor, gold retains its appeal due to its historical role as a reliable store of value. Cryptocurrencies, which lack the same level of trust and widespread acceptance, often see sharper declines as speculative interest evaporates.
   
   

2. Supply and Demand Fundamentals Just like most other things, gold follows the basic principles of supply and demand. Demand for gold derives from multiple sources like the jewelry industry, electronics industry, and investment demand (including central bank purchases). This diversified demand helps support gold prices during economic downturns.
   
   On the other hand, cryptocurrencies are still in the early stages of mass-adoption, and their prices are primarily driven by speculative demand, as well as other economic factors. When investor interest in cryptocurrencies fades, as it often does during bear markets, prices can drop precipitously due to the lack of underlying demand from other sectors.

   
   

3. Institutional Preferences: Gold’s Stronghold in Global Reserves Central banks around the world long employed the strategy of holding significant reserves of gold to hedge against economic instability and currency fluctuations. In fact, central banks have been net buyers of gold for over a decade, reinforcing its importance in the global financial system. They purchased 1,037 tonnes of gold in 2023 following a record-high of 1,082 in 2022, marking the two largest annual purchases in history.
   
   Cryptocurrencies, on the other hand, have yet to gain the same level of institutional support, though it is growing. A survey conducted by EY Parthenon on institutions are investing in blockchain and crypto assets. The survey goes on to say 35% of respondents have invested 1%-5% into some form of digital assets and/or related products – BTC and ETH spot trading being the majority’s investment style. Other reports confirm this by saying that Bitcoin is seemingly the preferred cryptocurrency for institutions.
   
   Yes, more institutional investors have begun to explore digital assets. This may signal the beginning of that mass-adoption which may ultimately increase the overall crypto market cap (which we will discuss next).
   
   But as of now it still does not carry the same weight (another pun intended) that gold does – unless they’re investing in digital gold, in which case we fully support that especially if they’re buying DAU.
   
   

4. Liquidity and Market Size Gold’s market cap is significantly larger and more liquid than that of the crypto market. The total market capitalization of above-ground-gold is estimated to be over $18.5 trillion, while the entire cryptocurrency market at time of writing (Oct, ’24) is $2.3 trillion.
   
   Gold’s deep liquidity allows investors to enter and exit positions with ease, further contributing to its stability.
   
   Crypto’s comparatively small market cap means that it is more susceptible to price manipulation and sharp price swings during periods of low liquidity, as we’ve seen when discussing Bitcoin’s 2018 crash. This lack of liquidity exacerbates losses during crypto winters and bear markets.

Conclusion

Crypto winters and bear markets pose as difficult times for an investor. In traditional investing, investors look to gold to hedge their riskier investments. In the crypto market, people believe that BTC might be that asset, but as we’ve seen now, it is exposed to more volatility than it should to be considered in the same echelon as gold.
Gold has matured, been relentlessly tested by crises, and showcased its intrinsic value over ages. So, it will likely remain as the safe-haven asset and continue to be the go-to for those who know to use it – either in physical or even digital form.

However, as the crypto market grows in popularity and confidence, we are likely to continue to see institutional investments leaning towards pumping their digital bags to grow their portfolios, at a risk. And we can speculate that the cryptocurrency market will mature over time, and as it does, crypto assets like Bitcoin might well be a strong contender for a dependable investment during market downturns.

Until then, gold takes the, well… gold.