Key Takeaways

• Bitcoin’s correlation with gold is currently at its lowest level since FTX collapsed in November
• Our Head of Research writes that while one day Bitcoin may become a store of value, the numbers say it currently trades like an extreme risk-on asset
• Bitcoin lost 76% of its value amid the pullback in risk assets once central banks around the world transitioned to tight monetary policy amid the inflation crisis
• Meanwhile, gold traded flat and is currently close to all-time highs
• Bitcoin’s correlation with growth stocks and riskier sectors of the stock market remains tight

One of the ultimate bull scenarios for Bitcoin is that it morphs into some kind of digital gold. 

For whatever reason, humans have been obsessed with this weird, shiny metal for thousands of years. Stories date back even further, but we have concrete evidence that gold was an important symbol of wealth in Ancient Egypt in 3000 BC, as well as part of everyday life and mythology. 

Bitcoin, on the other hand, was not around in Ancient Egypt. Nor was it around for the Middle Ages, the Great Depression in the early 20th century, a World War (yet?), the inflation and energy crisis of the 1970s, and it even missed most of the subprime mortgage crisis of 2008. 

In fact, Bitcoin was launched in January 2009, the Genesis blocked mined only two months before the stock market bottomed. Over the next twelve years, not only did the stock market recover, but it went absolutely bananas. Between the 2009 trough and the peak at the end of 2021, the S&P 500 multiplied 7X while the Nasdaq jumped nearly 13X. In other words, Bitcoin was launched into one of the most explosive and longest bull markets in history. Until 2022, it had never known anything but basement-level interest rates and up-only markets. 

Gold’s hedge properties are what Bitcoin seeks

Once 2022 came, risk assets sold off. The Nasdaq shed a third of its value; the S&P 500 fell 20%. Bitcoin had dipped plenty before, but make no mistake: this was the first time it was staring a bear market in the wider economy in the face.

 Despite certain enthusiasts claiming Bitcoin would act as a hedge asset, this did not happen. By the end of 2022, Bitcoin was 76% off its high. In the most explosive inflationary environment since the 1970s and Bitcoin’s first bear market, the asset was getting crushed. There was no debate: Bitcoin was trading like a risk-on asset. And today, it still is.  

That is not to say that the narrative could flip in the future. Personally, that is what I view as Bitcoin’s upside: a store of value akin to gold. But while we can debate whether that may one day happen, it is unequivocal that Bitcoin currently trades like a risk-on asset. These are the facts of the case, and these are undisputed, to borrow Kevin Bacon’s phrase from the absolute classic that is A Few Good Men. 

Gold, on the other hand, traded flat during 2022, and is currently trading close to all-time highs. 

Bitcoin and gold correlation dipping

For all the reasons discussed above, the correlation between gold and Bitcoin is particularly interesting to track. Using the 60-Day Pearson indicator, I have plotted it on the below chart. 

Immediately, the past month jumps out. The correlation was a near-perfect 0.86 at the start of June, and had been around this level since late April. And then, it fell. It currently sits at 0.16, the lowest mark since FTX collapsed in November, sending the crypto market into a tailspin. But why?

Well, I don’t really know. And that is kind of the point. Bitcoin, as it tends to do sometimes, is rising at the moment. Most likely, this is due to news of asset managers Blackrock and Fidelity filing ETFs, but maybe it’s just Bitcoin doing its thing. Perhaps it is merely bouncing back from the sharp fall it took after the Binance and Coinbase lawsuits were announced back-to-back two weeks ago. 

But if we stretch out the time horizon on the previous graph, we see that the correlation between gold and Bitcoin bounces around a lot.

It is challenging to put any pattern on that, to say the least. I thought I might try a different metric, so in the next graph I have used 90-Day Pearson instead of 60-Day. Predictably, the trend is less volatile, but there still appears to be no meaningful relationship here. 

I think it’s pretty clear that assessing the correlation coefficients directly proves that there is zero positive relationship between these two assets. 

Federal Reserve holds the key

In truth, I believe this actually says more about gold than Bitcoin. Gold is in a funny place at the moment, trading more off expectations of inflation and interest rate movements rather than current conditions. The correlation between gold and the stock market is therefore higher than what we have typically seen in the past. This is why we are seeing gold often advance when soft CPI numbers are announced, or when dovish Fed comments surface regarding interest rate policy.

If we step back and look at the big picture, it really is not complicated. Bitcoin has gone from $68,00 in November 2021, when money was cheap and risk assets were trading at outrageous valuations, to $15,500 last November, seven months into the swiftest hiking cycle in recent memory and the worst inflation crisis in 50 years. Then, it doubled to $30,000 as inflation numbers fell away and expectations around the length of the hiking cycle softened. 

Along with all the fakeouts and reverberation in between, that is a hell of a lot of movement and clearly trading like an extreme-risk asset. Meanwhile, gold has been far less volatile, relatively range-bound between $1,600 and $2,000 for three years now. 

Again, while Bitcoin may one day seize the crown of an uncorrelated asset, or a portfolio hedge to inflation, that is clearly not the case today. The below chart is the simplest method of all to show this, plotting Bitcoin’s hand-in-hand relationship with the tech-heavy Nasdaq composite since the economy transitioned to this risk-off, tight monetary policy period. 

A few months ago, Bitcoin rose during the banking crisis, sparking some to declare it as decoupling from risk assets and the fiat world. As I wrote back then, this is nothing more than wishful thinking. Rather, it moved off expectations that the Fed would not be able to hike as aggressively in future if banks were going under due to the strain of these higher rates (indeed, soon after, the correlation rose back up).

The latest dip in correlation with gold, falling back down from the ultra-high 0.86ish value it has been for six weeks or so, is similar. There is nothing ambiguous about the situation at the moment – Bitcoin is trading like a risk-on asset. It may one day claim that coveted title of digital gold, but right now it is nowhere near.

Green crypto: The upcoming Ethereum upgrade to proof-of-stake (PoS) translates to a 99.95% energy consumption reduction. The same is the case with other PoS cryptocurrencies that use economic validation instead of mining computing power.

This is an extract from Be[In]Crypto’s new free downloadable e-book, called Sustainability and Cryptocurrencies: An Analysis. Download it here.

Here are some of the more prominent crypto projects that have been developed as proof-of-stake from the get-go.

Green Crypto: Efinity

An effort of NFT and gaming-focused project Enjin, Efinity is a blockchain built on the Polkadot network. The network is attempting to serve as a mainstream and developer and user-friendly NFT experience that runs at low cost and high speeds. It describes itself as an NFT highway, as opposed to a general computing blockchain.

Enjin CTO Witek Radomski has spoken about the use of Polkadot and its eco-friendly nature, saying, “There are other, greener PoS protocols available: Polkadot is proving to be among the most viable and carbon-conscious options, using the equivalent of 6.6 US households worth of energy per year, which is why we’ve chosen it as the destination for our NFT parachain, Efinity. Parachains do not require additional energy resources to operate, so Polkadot’s energy consumption will remain less than 0.001% of Bitcoin.” 

Efinity aims to become a hub for both fungible and non-fungible assets, with a new token standard for compatibility across all networks and standards. 

Green Crypto: Nano 

Nano (NANO) cryptocurrency represents a shift from both Bitcoin and Ethereum. Instead of having nodes with full blockchain records, each wallet address has its own blockchain (block lattice) that is updated when transactions are executed. The updated status of this ledger is then relayed to the Nano blockchain, verified and integrated after confirmations from other Nano nodes.  Therefore, unlike both PoW and PoS networks, in which transactions are lined up for block inclusion and fee distribution, Nano nodes have a voting power on who creates blocks. Because this can be done at low or zero fee, having transactions included in the Nano blockchain is executed without cost.  

Nano has talked about how the argument around bitcoin’s energy usage is outright wrong.

Says George Coxon, director of the Nano Foundation, “The argument around energy usage of Bitcoin in the cryptocurrency space is not about who is right or wrong, it is fundamentally about progress. If a better solution comes along, you use it – that has always been the case with technological progression through the ages. Arguments around the energy consumed for the bitcoin network revolve around statements such as, ‘it uses renewable energy so it’s fine’ or ‘It’s fine because the energy being used has already been created’ – this is the creation of a positive feedback loop of support and misguidances.

“The defense statements themselves may not be factually incorrect, it doesn’t really matter. My point is that if there is a technology that has burst onto the scene, whether cryptocurrency or not – that is not looking towards an energy sustainable future of the world, then more innovation needs to happen to make it so.”

Nano and Open Representative Voting

In technical terms, Nano uses not just proof-of-stake consensus but a delegated proof-of-stake (DPoS), and not just DPoS but its variation dubbed Open Representative Voting. Depending on the account balance, each node is delegated with a voting weight. These votes can then be used or distributed to another Nano node.

As for Nano’s energy consumption, Colin LeMahieu, founder and director of the Nano Foundation says, “Nano has an energy footprint for 1 transaction being 0.00012kWh and a whole network that could run off a single wind turbine- to put this into perspective, that is 15.5million nano transactions using the same energy as a single bitcoin transaction.”

With sufficient voting weight, each node can become a Principal Representative, able to vote on transactions in proportion to held funds. However, none of the representative nodes receive fees from voting on which transactions/blocks are to be included in the network. Furthermore, individualized account blockchains, called Block Lattice, make it possible for users to immediately update their account balances, without waiting for network confirmations.

Interestingly, Nano also uses some measure of proof-of-work energy proofing as a discouragement tool against spamming the network with transactions. However, although Nano provides free transactions and instant confirmations, it is not clear if its lightweight PoW is sufficient to deter invalid transaction spam.

Early Days

In the early days, it would have only taken $3 million worth of GPUs to completely centralize the network. Indeed, because validators don’t get paid, no one but organizations with vested interest have an incentive to run the network.

Accordingly, Nano’s voting weight is distributed across a couple of crypto exchanges, Kraken and Binance, alongside Nano Foundation and 465 Digital Investments, a private equity group. However, although Nano network can’t boast decentralization, it can claim to have zero-fee transactions at a negligible 0.111 Wh energy expenditure per transaction. As such, Nano has its own sustainability section in order to attract investors.

Nonetheless, with a market cap of $378 million, which is 0.04% of Bitcoin’s, the novel concept doesn’t seem to have gained much traction. In other words, Nano has already accomplished what Greenpeace is asking from Bitcoin now, but its long-term prospect is still not appealing. However, those in charge are firm in their belief that crypto should support eco-friendly initiatives.

Says Colin LeMahieu, founder and director of the Nano Foundation, “Cryptocurrency firms that support and facilitate non-sustainable technologies yet have their tag line being ‘bank the unbanked’ or USP to provide banking for those in emerging economies – it is those people that you are supposedly trying to help that will feel the largest brunt of climate change and responsibility to not using or facilitating greener solutions must be taken. Digital money should not cost the Earth.”

Green Crypto: Cardano 

Cardano (ADA) shares its origin with Ethereum, as Cardano’s key developer, Charles Hoskinson, also co-founded Ethereum with Vitalik Buterin and six other founders. Given this shared legacy, Cardano is also a generalist smart contract platform, designed to deploy dApps that cover NFT marketplaces, decentralized finance (DeFi), and blockchain gaming.

Named after Italian mathematician Gerolamo Cardano, the network shares a commonality with Bitcoin in that it has a fixed coin supply. While Bitcoin maxes out at 21 million, Cardano’s ADA tokens are capped at 45 billion.

Compared to Ethereum, which is yet to fully transition into a proof-of- stake consensus, Cardano was one from the get-go, dubbed as a third-generation smart contract platform. 

Although Hoskinson left Ethereum for a monetary reason, as Vitalik sought to keep it open-source and nonprofit, Cardano turned out to be one of the most decentralized public blockchains with over 3,000 validator nodes. That may seem tiny compared to Ethereum’s over 300k validators, however, such contrast is misleading.

Nodes

As long as Ethereum validator has over 32 ETH (~$112k) they can run multiple nodes. In contrast, the maximum capacity of Cardano’s staking pool is 64 million ADA (~$77m). Presently, there are 3,219 ADA staking pools with a 72.5% stake/supply ratio. Therefore, if Ethereum’s validator accounting is to be applied to Cardano’s ecosystem, the latter would have 200k validators (64 x 3,219). 

With that said, Cardano dApp ecosystem is yet to fully come online. While Ethereum hosts 2,948 dApps tied to blockchain’s smart contracts, Cardano only has 72 listed. The reason for this wide gap between the two platforms is that Hoskinson took a more robust, peer-review approach to code development.  

Whether a more secure and robust coding practice pays in the end, the market will decide. However, when it comes to Cardano’s energy output, it will certainly not draw attention from any environmentalist group. According to Cardano Blockchain Insights, the entire network consumes only 0.00282160 TWh. Compared to Bitcoin, this is 46,400 times less energy consumption. 

Green Crypto: Algorand 

Algorand (ALGO) is another open-source PoS network aiming to create a dApp ecosystem based on blockchain’s smart contracts. Developed by MIT computer scientist Silvio Micali, Algorand’s main focus is to facilitate near-instant payments. Specifically, by having the capacity to process over 1,000 transactions per second (tps) and executing them in under five seconds.

This is way ahead of Ethereum’s current standard of 14-17 tps under five minutes. Algorand makes this possible by having integrated a two-tier network structure. While Ethereum relies on layer 2 scalability networks, such as Arbitrum, Polygon, Optimism, Loopring, Immutable X, and others, Algorand was developed from the beginning with scalability in mind.

Energy

Silvio Micali said in a recent keynote speech, “While some blockchains consume as much energy as a small country, Algorand consumes as much as 10 homes. Being green is our pride and our moral obligation. The less privileged are the first to suffer from the degradation of the environment – a blockchain that is bad for the environment is a bad blockchain. Period. Algorand developed a public blockchain that runs on a version of proof-of- stake, which drives electricity consumption to almost zero…on a fundamental level,” Silvio Micali said. “I care about the planet.” 

Just like Cardano, Algorand has a fixed token supply of 10 billion ALGO tokens. However, because Algorand uses a PoS variation – pure proof-of-stake (PPoS) – it means that all ALGO holders participate in securing the network and receiving transaction fees. Moreover, the minimum threshold is only 1 ALGO compared to Ethereum’s high threshold of 32 ETH. 

While this drastically lowers the barrier of entry and incentivizes network participation, it remains to be seen if this will negatively affect the network’s security in the long run. After all, a higher stake incentivizes greater care.

Furthermore, Algorand doesn’t even employ an Ethereum-like slashing mechanism for users who propose bad blocks. However, that does not appear to have been a concern for others, as Climatetrade CEO Francisco Benedito has said that Algorand was the right technology for its needs, “After analyzing several technology providers and rigorous due diligence, we chose Algorand as the blockchain infrastructure to power our platform. We have no doubt, Algorand is the perfect solution due to its flexible architecture, low transaction fees and scalability of transactional performance. In addition, they are the only pure proof-of stake (PPoS) network and we have an aligned business vision.”

Slashing Mechanism – Green Crypto

In September 2021, Algorand Foundation introduced a slashing mechanism proposal in which bad actors would lose 8% of their staked ALGOs.  However, it failed to pass in favor of the existing system in which they only lose distributed rewards without further penalties.

As is the case with other PoS blockchain networks, Algorand’s energy consumption is negligible at 0.000008 kWh per transaction. In April 2022, Algorand has a $2 billion market cap with fewer than 100 dApps, some of which are still in the testing phase.

While Ethereum transitions into PoS this year with the Merge, Algorand’s integrated two-tier structure and low energy consumption may not be enough for its long-term appeal.  

Green Crypto: Stellar Lumens 

Stellar Lumens (XLM) shares its origins with Ripple, both peer-to-peer (P2P) digital currencies were developed by Jed McCaleb. However, while Ripple leans on the institutional side of money transfers with its banking and payment processors network, Stellar is focused on granular, individual payment service.  

To achieve that, the Stellar Network, launched in 2014, runs XLM tokens. Via this P2P money, the goal is to facilitate borderless payments with the least transaction fees possible. In other words, it helps the unbanked enter the digital economy by creating a decentralized remittance market, provided they have basic internet access and a smartphone capable of hosting a digital wallet. 

While Terra and Tron blockchains already provide such a service with stablecoins, Lumens act as an intermediary money transmitter. Meaning, when user A sends user B money, the former can pick a different currency than the one user B receives.

XLM – Green Crypto

The Stellar Network converts the original currency into XLM and seeks the optimal trading pair to deliver the destination currency. Stellar’s Anchors make that exchange possible as they hold deposits and even issue credit. With all the Anchors within the same Stellar network, transactions complete in under 5 seconds with a fee of only 0.00001 XLM ($0.00000216).

Without a doubt, this makes the Stellar Network one of the most cost-effective ways to transfer money. Moreover, there is no mining or staking involved as the Stellar Development Foundation (SDF) controls XLM supply, set at 50 billion. 

Because it doesn’t use either PoS or PoW but its own consensus algorithm based on the Federated Byzantine Agreement (FBA), dubbed Stellar Consensus Protocol (SCP), Stellar Lumens (XLM) is another network with exceedingly low energy consumption of only 0.00022 kWh per transaction.  Just like Ripple, Stellar has accrued a large list of partners enabling its network to spread globally. Among them are IBM World Wire, CEX.io, Blockchain.com, MoneyGram, Circle, and Flutterwave. The latter is ideal for money transfers between Africa and Europe. Likewise, Blocknify can use the Stellar network to notarize official documents. Presently, Stellar’s market cap is $5.3 billion.

This is an extract from Be[In]Crypto’s new free downloadable e-book, called Sustainability and Cryptocurrencies: An Analysis. Download it here.

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Input Output (IO) CEO Charles Hoskinson is pleased with Cardano’s progress to date.

Speaking with Dan Gambardello from the Crypto Capital Venture YouTube channel, Hoskinson said people are too focused on the micro picture.

He added that this perspective doesn’t take into account achievements made to date, nor does it give leeway for bumps in the road. Especially considering the scale of the task at hand, which can be summed up as utilizing blockchain technology to make positive change at the global level.

Hoskinson’s words were in direct reference to community pressure over Cardano’s meager dApp offerings so far. Many assumed four months since Alonzo smart contracts went live, that the ecosystem would be a bustling hive of activity by now.

However, to the frustration of many, just one Cardano dApp, in MuesliSwap, is listed on DeFi Lama.

Hoskinson is pleased with Cardano’s progress

Framing the situation, Hoskinson summarized Cardano’s progress saying we went from nothing to becoming a top 10 project, and a significant force in setting the research standard for Proof-of-Stake.

“with over 100 exchanges, 2 million people, 130 dApps being built, 2 million assets issued on it.”

However, despite the achievements made since late 2017, the Cardano founder said people “get caught on the narrow.”

In justifying the delays, Hoskinson said there had been significant changes throughout the four-year journey. All of which forced IO to take new approaches, leading to the delays people are complaining about.

“We had to rewrite the software three times, there were major changes in architecture and vendors. There were approaches taken that didn’t work out, there were of course delays.”

Delays don’t invalidate what has happened before

Taking the opportunity to equate circumstances with Ethereum, Hoskinson points out that Vitalik Buterin initially gave ETH 2.0 a 2018 rollout date. But now, Buterin’s estimate comes in at some time in 2025.

“Vitalik said that in 2015, he said Ethereum 2 would come out in 2018, worst-case scenario. It’s 2022, he’s saying maybe 2025.”

Last week, Buterin said that ETH 2.0 is approximately 50% of the way to completion. However, major tasks, in merging the ETH 1.0 and ETH 2.0 chains and in implementing sharding, are still to be tackled.

Hoskinson asks whether this means Ethereum’s achievements to date are “bad.” Answering himself, he says no, “it’s just the nature of the game” when building blockchains.

“Does that mean everything Ethereum has done and achieved is bad? No, it’s just the nature of the game and there’s things you learn along the way.”

The latest Global Financial Stability Report by IMF highlighted the volatility factor in virtual currencies. While IMF stated that the crypto sphere opens pathways to several new opportunities including improved and affordable cross-border payments; it also alerted people that the digital currency assets pose financial stability challenges.

“The rapid growth of the crypto ecosystem presents new opportunities. Technological innovation is ushering in a new era that makes payments and other financial services cheaper, faster, more accessible, and allows them to flow across borders swiftly…Despite potential gains, the rapid growth and increasing adoption of crypto assets also pose financial stability challenges,”, stated IMF.

The Financial Counsellor, Director of the Monetary, and Capital Markets Department of IMF, Tobias Adrian told the Press Trust of India (PTI) that cryptocurrencies like Bitcoin could be the sole cause of instability in lieu of its extreme price swings. He also compared crypto to equities, commodities, and exchange rates. He emphasized that, while all of them are risks to investment, crypto still takes the crown for being the riskiest because of volatility. Adrian asserted that crypto may be a good investment opportunity but can never compare to that of a monetary aggregate.

“It might go back up, it might go back down. So if you’re a merchant, and you’re quoting in Bitcoin, you’re exposed to this massive volatility. It is much more volatile than equities or commodities or even exchange rates. It’s a very, very volatile asset, and that is introducing instability…It’s fine as an investment asset. But as a monetary aggregate, it just doesn’t have the right properties”.

IMF report criticizes Stablecoins

The IMF report also took the regulators’ stance by reinstating that crypto is in grave need of a legal framework. The report mentioned stablecoins’ rapid growth as a potential risk to the economic system, and that the regulators should impose laws on them. Furthermore, the IMF report promoted the issuance of CBDCs in the digital era.

“Policymakers should implement global standards for crypto-assets and enhance their ability to monitor the crypto ecosystem by addressing data gaps. As the role of stable coins grows, regulations should correspond to the risks they pose and the economic functions they perform. Emerging markets faced with cryptoisation risks should strengthen macroeconomic policies and consider the benefits of issuing central bank digital currencies,”.