Is Bitcoin Safe-Haven Asset? What Experts Think
Bitcoin has long carried the informal title of digital gold. This title implies that Bitcoin was believed to share certain qualities with gold, namely being a protective asset during periods of market turmoil.
But being conceived after the global financial crisis of 2008–2009 Bitcoin never had a chance to undergo a stress test of that magnitude. As the world is arguably on the brink of another global recession, many eyes are fixed on Bitcoin.
Yet lately Bitcoin’s price has been moving along with risk assets like stocks, falling close to 30% in a matter of days, forcing many investors to decry its safe-haven qualities.
Is Bitcoin a protective asset? Was it ever? In this article, we will provide additional context and explore expert opinions on this matter to help you make your own decision.
Situation Has Been Building Up
The situation in the markets was not very stable from the start of the year. It all started with the U.S.-Iran conflict in January. When the coronavirus outbreak hit, it disrupted the Chinese economy and spawned anxiety around the world. The plummeting oil prices caused by Russia’s exit from the OPEC+ agreement were the final blow.
The combination of these factors and the preexisting condition of the enormous debt bubble triggered the scariest decline in the stock market since the 2009 global crisis.
On March 12th, several simultaneous events made the level of panic around the world skyrocket:
- WHO officially declared the global epidemic of COVID-19 strain coronavirus.
- President Trump addressed the nation and announced certain drastic measures the U.S. was to take as a precaution against the epidemic, including suspension of travel from Europe.
- All three major U.S. stock market indices (Dow Jones, Nasdaq, and S&P 500) plummeted by around 5%.
This resulted in a panic sell on the Bitcoin market, making Bitcoin’s price drop below $6,000 for the first time since May 2019. To recall that day in finer detail, check our dedicated piece with expert comments and live updates as the situation evolved.
To many, this outcome was unexpected.
Surprised we're seeing the Bitcoin price fall in this environment, would have expected the opposite.
— Brian Armstrong (@brian_armstrong) March 9, 2020
One would think that Bitcoin, being a protective hedging asset, would surge during the panic in the stock market. What went wrong?
Bitcoin Is Trading Like a Risk-On Asset
Trader and analyst Alex Kruger predicted the sharp drop in Bitcoin’s price a few days prior. In his opinion, on the backdrop of panic on global financial markets investors were looking exclusively to de-risk.
Good to be mindful of global markets risk appetite, even if crypto is a mostly uncorrelated asset class. Markets are falling apart. It looks overdone, but headline risk isn't over, finance people are feeling cautious and with no need to rush. This seems to have crept into crypto.
— Alex (@classicmacro) February 26, 2020
As traditional stock markets were plummeting, Bitcoin was no safe haven either.
Time to pay attention. Bitcoin is trading like a risk-on asset. Not a safe haven, but the exact opposite. Following stocks down – although ironically stocks are the ones trading like low quality shitcoins. pic.twitter.com/IPqloMzQs9
— Alex Krüger (@krugermacro) March 12, 2020
Michael Novogratz noted that when things go south, investors want to be extra conservative.
How did $btc go from being a hedge against bad stuff to getting washed out and trading like a risk asset? When things go from bad, to very very bad like they did last week, investors take leverage down as fast as they can. They book profits to make up for other losses. Ouch.
— Michael Novogratz (@novogratz) March 1, 2020
In his Crypto Trader Digest, Bitmex CEO Arthur Hayes echoes Novogratz’s analysis but reassures the community that the fall would not be that catastrophic.
“The fear and uncertainty facing humanity is enough to inspire a global margin call. Bitcoin will not escape. While I don’t believe we will revisit $3,000, max pain probably resides somewhere between $6,000 to $7,000 Bitcoin. Any crypto hedge fund that allows quarterly or less liquidity will be getting distress calls. They will be dumping coins into a falling market. That will push the price lower on the margin.
“I know all you HODLers say you love ‘cheap coins,’ but will you really back up the truck if the S&P is flirting with 2,000? We shall see.”
The vehement critic of Bitcoin Peter Schiff took to Twitter to gloat over the current situation.
Bitcoin is no longer a non-correlated asset. It's positively correlated to risk assets like equities, and negatively correlated to safe-haven assets like #gold. When risk assets go down, #Bitcoin goes down more. But when risk assets go up, Bitcoin goes up less. No value in that!
— Peter Schiff (@PeterSchiff) March 10, 2020
Yet not all experts were so sure about Bitcoin’s loss of safe-haven status.
Bitcoin and Gold Are Doing the Same Thing
Despite the apparent fallout, some industry celebrities insist that Bitcoin is in fact a protective asset and the recent events do not necessarily prove otherwise.
If bitcoin isn't gold 2.0, then what is it? The fact that it's not acting how you might expect only underscores just how early it is.
— Tyler Winklevoss (@tylerwinklevoss) March 14, 2020
Replying to Mr. Winklevoss, an influential investor Anthony Pompliano elaborated that Bitcoin is currently performing not unlike gold back in 2008.
Bitcoin and gold are doing the same thing, just as you would expect them to in a liquidity crisis..they go down.
Same thing happened to gold during liquidity crisis of 2008 too.
Here is context https://t.co/UJUB08smYN
— Pomp ? (@APompliano) March 14, 2020
He added that stock markets were even more volatile than Bitcoin on that fateful day. And while stock investors were not used to such volatility, the Bitcoin community remained more or less unphased.
It May Actually Be More Complicated
Finally, there are voices that suggest that Bitcoin’s status as a protective asset or a risk asset is not set in stone.
Researchers at Longhash say that while Bitcoin does not perform as a safe haven asset right now, it does not necessarily mean that it has not performed as such before or will not later. Analyzing data on Bitcoin vs. Dow Jones correlation year by year, they concluded that Bitcoin could, in fact, be a safe haven from certain traditional market activities, but never a reliable one.
Correlation between the Bitcoin price and Dow Jones. Source: Longhash
In general, Bitcoin has shown a strong correlation with the index, but there were exceptions to this pattern, the entire years of low or even negative correlation.
Binance Co-Founder and CEO Changpeng Zhao offered a similar and more nuanced opinion, stating that while today neither Bitcoin nor gold managed to perform as store-of-value, in other contexts (such as inflation, war or rising banking fees) Bitcoin may yet be up to the task.
Other contexts differ, such as: war, stock market crashes, inflation, expensive banking fees…
— CZ Binance ??? (@cz_binance) March 12, 2020
Sailing Into Uncharted Territory
One thing is clear. Bitcoin has never been through an acid-test of a global financial crisis magnitude. As oil price continues to go down and coronavirus shows no signs of slowing down, both traditional and crypto markets can expect further turbulence in the near future.
While the crypto optimists may be inclined to buy more Bitcoin while it’s cheap, Mr. Hayes of Bitmex advises to not buy until the futures’ basis goes flat or negative, after which he suggests to buy with both hands.
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