Bitcoin — A Safe Haven Asset ?

When the stock market drops, investors usually exit stocks and invest in safer assets such as US treasury bonds, gold and utilities. This is termed a “flight to quality” event. Assets which go up in value during periods of market volatility are called safe-haven assets. The recent Greek debt crisis has led many to claim that Bitcoin has evolved from a mere cryptocurrency to a reliable and respectable safe haven asset. WSJ hypothesized that Bitcoin could be used to prevent a future Greece. Fortune has also noted how Bitcoin can be used to circumvent currency controls and send money into Greece. NASDAQ has highlighted the recent strength of Bitcoin compared to Gold, an asset whose dependability can be traced back across centuries.

On June 23rd, the S&P 500 index closed at 2124, by July 8th it had closed at 2047, a decline of (-3.62%) due to Grexit concerns. During the same time period, Bitcoin rose from $247 to $270, for a gain of +9.31%. Bitcoin’s resilience and uncorrelated return is not a fortunate outcome of the Greek crisis; it is a feature which can be demonstrated by looking at previous market selloffs.

Since Bitcoin entered mainstream acceptance in 2013, the market has undergone three sizable drawdowns greater than (-4%).

1) The summer 2013 “Taper Tantrum” was catalyzed by Fed Chairman Ben Bernanke’s view that bond market valuations were frothy. He also indicated that the Fed was looking to slowly reduce its purchases of financial instruments through a program called Quantitative Easing. Due to his comments, the global stock markets and bond markets fell considerably. The S&P fell from 1652 to 1573, a decline of (-4.78%). During the same time period, Bitcoin remained mostly unchanged, barely rising from $101.85 to $102.09. Bitcoin did not follow the S&P 500 down or up and showed that it’s not affected by changes in interest rates or inflation expectations.

2) The market saw another large sell-off early in 2014, dropping from 1845 on Jan 22nd to 1742 on Feb 3rd, for a decline of (-5.82%). The selloff was a catalyzed by China’s decision to allow a high-yield investment product to default. The markets panicked because it feared a wave of defaults, affecting equity and debt assets globally. Eventually the selloff abated when China stepped in to prevent the default. Bitcoin was completely unaffected by the threat of a credit crisis in the financial markets. As you can see from the chart, Bitcoin traded within a very narrow range during the time period. Due to a (-3.42%) decline, the price of Bitcoin fell from $877 to $847, outperforming the S&P 500 and other global indices.

3) The most recent sell-off occurred in October 2014 with a sudden decline in oil prices and the threat of Ebola spreading to the US. The market started declining around mid-August but then accelerated its losses from October 6th-October 16th, dropping (-5.35%). During the same time period, Bitcoin prices actually rose from $311 to $392, a gain of +26%. The price of Bitcoin is not affected by consumption or travel and is disconnected from the rest of the financial market which is very sensitive to any economic data.

Due to Bitcoin’s lack of correlation with other financial investments, Hedgeable recommends a small portfolio allocation to the cryptocurrency for clients. Even minor adoption of Bitcoin for payments or cross border transactions will greatly increase its value due to limited supply. Transaction volumes for Bitcoin skyrockets every time capital controls are erected in any country. When the next Greece or Argentina hits, people may stop speculating in Bitcoin and actually use it as a viable currency for the exchange of goods and services.

Disclaimer: This is not a solicitation to buy or sell securities or an offer of personal financial advice. Past performance is not indicative of future performance. It is suggested you seek out the help of a financial professional before making any investing or personal financial management decision.