Is Bitcoin a Safe-Haven Asset?
Two important events for Bitcoin have already occurred during the first half of 2020: the escalation of the conflict between the US and Iran, as well as the outbreak of coronavirus. Amid each of these events, the prices of bitcoin, gold, and silver rose. That is why many journalists and market analysts again began to call bitcoin a “Safe-Haven Asset.” Listing.Help analysts check whether this supposed correlation is enough to claim that Bitcoin will continue to grow and is bitcoin a safe haven asset?
What is a Safe-Haven Asset?
Safe-haven assets are considered as investment products that maintain or increase their price during a crisis. Investments in safe-haven assets diversify the investor’s portfolio and are profitable during periods of market instability. Safe-haven assets include precious metals (for example, gold and platinum), real estate, cash (US dollar, yen, and Swiss franc), as well as certain types of securities (bonds, some shares).
For many years, gold has been considered as the main store of value. The fact is that gold cannot be subjected to additional emissions as fiat cash, and its value is not affected by decisions on the interest rate made by the government. As gold has historically retained its value, it serves as a form of insurance against adverse economic events. If such events occur, investors tend to invest in gold, which only grew their price due to increased demand. If there is a threat of inflation, the value of gold also increases as it is valued in currency equivalent.
Safe-haven assets include some types of stocks (and ETF funds based on their type): utilities, healthcare, biotechnology, and consumer goods companies. Regardless of market conditions, consumers are still planning to buy food, drug, and home products.
It is also believed that cash is a safe haven in times of recession in the market. Indeed, Swiss franc, Japanese yen, and ever since the time of the Marshall Plan, the US dollar, are often distinguished among defensive assets. However, cash does not produce any real profit or income and is negatively affected by inflation.
Pro
According to many experts, the price of BTC is growing amid concerns about the global epidemic of coronavirus. However, to verify the claim that “Bitcoin is a safe-haven asset,” we need to check statistics of crisis and see how Bitcoin’s price reacted to them.
So, we can highlight several crisis phenomena:
- Cyprus Banking Crisis of 2013: then Bitcoin surged from $47 on March 16, 2016, to $88 on March 28 amid discussions about freezing the accounts of many Cypriot banks and using funds to pay off state debt to the EU;
- attempts to seize Catalonia from Spain in early October 2017: several experts believe that then the price of bitcoin rose in during the events in Spain, as a safe haven for investors exposed to the influence of euro-denominated instruments and European stock markets.
- Economic crises in South Africa, Venezuela, and Argentina. It is believed that the inhabitants of these countries during crises preferred to accumulate their savings by bitcoin. Its rate was much less volatile than the national currencies of these countries; investors from these countries are also attracted by the built-in deflation mechanism of the Bitcoin network.
- During the aggravation of the high demand for bitcoin, the political crisis in Hong Kong was supported by the residents of the country. As a result, the price of bitcoin on local exchanges was 3–5% higher than among world exchanges.
In our opinion, most clearly, the possibility of using bitcoin as a “safe-haven asset” shows interest in it against the background of the possible onset of any large-scale hostilities. The first such example was a test launch of a long-range ballistic missile by North Korea towards Japan on August 29, 2017. In just one day, the price of bitcoin has grown from $ 4,000 to $ 4,700.
A recent striking example of rising prices against the backdrop of a military escalation was the conflict between the United States and Iran in early 2020. The development of the conflict and the exchange of rocket attacks increased the price of bitcoin by 20% from $ 6900 to $ 8300 in less than two days. At the same time, price of gold , oil and shares of military companies grew.
Peter Brandt, a well-known trader, and analyst consider the current crisis decisive for bitcoin and the cryptocurrency industry. He points out that “Bitcoin will have “big problems” if it cannot demonstrate growth amid a fall in the traditional financial market.”
Studying the graphs of the price of bitcoin and gold, we can conclude that, against the background of two crisis phenomena in January 2020, the price of both assets was significantly correlated. Still, the growth of bitcoin would be more pronounced. However, Coindesk, in a recent report, indicates that such a correlation was short-term and has no serious market implications.
Another aspect of the possible adoption of Bitcoin as a safe-haven is the generational factor. Some researchers suggest that the younger generation, who grew up in the digital world, understand bitcoin much better than the previous generation. This seems rational, given that a recent study by Blockchain Capital has shown that millennials prefer Bitcoin to Gold.
Cons
Not everyone shares the idea that bitcoin, in general, can be a safe-haven asset. The strongest argument economists cite in this matter is that, unlike gold, bitcoin is not a physical investment. Traditionally, an asset that cannot be used for purposes other than currency cannot be classified as a safe haven. In addition to its use as a currency, gold can be used for many other purposes, including medicine, the development of modern devices, and the creation of jewelry.
Bitcoin’s investment status is still unclear in many regulatory disciplines. The legislation of many countries approaches digital currencies more in terms of their taxation, while the development of property law and judicial practice may lag significantly.
Another obstacle to consider bitcoin as a safe-haven asset is its volatility. Critics point out that bitcoin cannot be used even as a store of value due to its volatility. At the same time, based on SFOX data, we can conclude that bitcoin is much less volatile than other major cryptocurrencies but more volatile than gold. As a result, researchers argue that Bitcoin should only be seen as an alternative investment for diversification instead of a safe haven.
The final argument is the correlation of the fall of Bitcoin and other financial assets amid of the sinking price of crude oil on March 9; this is 30% to $ 31. The price shock affected European and Asian indices: the FTSE 100 lost 5.98%, Stoxx600–5.5%, Nikkei 225–5%. At the same time, gold quotes for the first time since 2012 exceeded $ 1,700 per troy ounce. The price of bitcoin against this background collapsed to $ 3800. However, after that, Bitcoin’s price ceased to correlate with the main financial markets and returned to the $ 9000 area during March-April this year.
Such price movements have become a serious argument against the concept of bitcoin as a safe-haven asset. “Sorry to disappoint, but a 13% pump on a day that stocks are going up show that it’s being used as a vehicle for speculation and not as a refuge for safety, ” said Matum Greenspan, founder of QuantumEconomics.
Currently, the situation in the global economy is deteriorating so quickly that even the most reputable organizations have to rewrite macro forecasts every week. During this time, the need for safe-haven assets becomes especially urgent.
Safe-haven assets proved their low volatility during the Second World War, the oil crisis of the 1970s, the two Iraq Wars and the war in Yugoslavia, the financial crisis of 1987, 1998, and 2008–2009. Bitcoin, on the other hand, was created during the last severe financial crisis, and therefore its verification as a safe-haven asset is yet to be.
