While Bitcoin is becoming the preferred safe-haven asset choice of investors, every day the world is getting a step closer for the next economic crisis. This statement might be argued by some, so let’s look into if Bitcoin is a safe-haven asset during economic crisis.
August 11, 2019 | AtoZ Markets - Bitcoin is a decentralized digital asset without a central bank or single administrator, it can be sent from user to user without any intermediaries but with certain transaction costs. Bitcoin was launched during 2008 financial crisis by an unknown person or a group using a pseudo name Satoshi Nakamoto.
From the very first day till now, Bitcoin has gone a long way, from an economic experiment to globally applicable financial asset.
There is a famous quote by Gandhi:
“First they ignore you, then they laugh at you, then they fight, then you win!”
This quote is extremely applicable for Bitcoin, but so far it is in the fight stage.
In 2009, when the Genesis Paper was introduced most institutions ignored it. As we saw some exchanges getting hacked many traditional investment houses started laugh at this tool.
And now that Bitcoin has been the best performing financial instrument, we are into fight!
Excuses are vast! Bitcoin has been criticized for numerous things like use of illegal transaction, high electricity consumption, price volatility, thefts from exchanges and some big names thinks it has no intrinsic value and can lead to a disaster. Despite having certain criticism along the way, Bitcoin has managed to gain enormous value from starting price of $0.01 per Bitcoin to its all-time high of $20,000 during late 2017. After several ups and downs along the way, Bitcoin is currently expected to benefit from political instabilities which may lead BTC price to push towards and perhaps above the $20,000 zone in the coming months.
Recently the buzz over bitcoin’s role as a “safe-haven” asset hit the media. Bitcoin can play as “safe-haven” asset in times of economic crisis. At the end, this instrument has a few characteristics which may be able to play as a safeguard against the volatility of a financial crisis.
Global Economic Crisis and Bitcoin
Despite stock market price hike, the world economy Is not doing quite well. Things haven’t been so much instable since the cold war which signals another financial crisis by 2020. Current complex scenario indicating the upcoming economic crisis elements include US trade wars with China and other countries, restrictions on migration, foreign direct investment, and technology transfers could have profound implications for global supply chains while raising the risk of slower growth with high inflation. On the other hand, the EURO and the British economy is also facing the Brexit challenge and budget deficits.
Recently U.S. Federal Reserve has cut its rates by 25 points despite having stronger economy and lowest Unemployment rate in decades but taking the global economic slowdown into account and being pressurized by the White House Officials especially U.S. President Donald Trump for the rate cut, Federal Reserve managed to cut 25 points while the expectation was decrease by 50 points. Though there are certain speculation that, FED might cut rates for 2 times at least by the end of 2019 but it is still quite uncertain until FED confirms them after evaluating the upcoming economic data.
The Fed Chair seemed optimistic, but when we look at the yield chart, we get different prediction. An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This significantly indicates an economic recession.
The following chart represents the yield variations between the U.S. 10-year and also the U.S. 3-month over the past decade. In late 2006, the yield inverted for many months, followed by the 2008 monetary crisis and the U.S. economic recessions (the gray area). when over ten years, we are back within the negative space.
GOLD and BITCOIN – Correlation of Safe-Havens
As global risks emerging, traders and investors are currently more concerned with the diversifying their investments to avoid the financial crisis shock. Apart from Bitcoin, Gold price has surged broadly crossing $15,00 already this year as concerns over trade wars and a global economic slowdown. The fears of upcoming financial crisis and probable stock and housing market crash again is leading the investors to GOLD as well. Price of GOLD has surged 15% since May 2019 which is currently residing above 6-year peaks above $1450 per ounce.
According to a recent report from Bloomberg, the correlation between Bitcoin and GOLD has almost doubled in the past three-months. Though 3 months data set is relatively minor but as per recent study the two assets were traded inversely 49% of the time while in correlated downturn by 22% and uptrend by 29%.
Correlation between Bitcoin and gold, YTD and 3 months. Source: Bloomberg Opinion
Current mounting recognition of Bitcoin as safe-haven is currently fueled mostly by unpredictable geopolitical drop where GOLD also have significant share of it. The market sentiment is currently leaning towards both GOLD and BITCOIN considering them as safe-haven investments to shield them from risks and global economic devaluation.
Why do people invest in BITCOIN?
Most of the Bitcoin investors are actual opposition for the current global financial system. They believe that as long as central banks have the ability to print money, the cost of living, aka inflation will keep on rising. Thus, these investors or bitcoin supporters believe that during an economic crisis using Bitcoin as a safe-haven will have many advantages:
- Bitcoin is decentralized: Bitcoin is not controlled by any central authority. Most of the time economic crises arise from the faults made by one of these central authorities. So, using Bitcoin can assure a safe-haven asset in any economic crises.
- Bitcoin is safe: An Investor/Trader can access to his Bitcoin wallet from anywhere on the planet. They will only need access to internet though WIFI or mobile data. That’s it, now anyone will be able to purchase, transfer, make payment through Bitcoin.
- Bitcoin has store of value: Bitcoin can easily be used as a universal store of value where Ownership is easily transferable.
- Bitcoin is government proof: There are restrictions in Bitcoin regarding transferring money overseas. Some countries have made regulations to restrict Bitcoin. However, Bitcoin is decentralized. Thus restrictions generally increase demand for this asset.
- Bitcoin is a completely new financial asset not directly correlated with any other: Distanced and historically very different from traditional markets. Bitcoin is not correlated to the traditional market. As a result, Bitcoin doesn’t react or get affected by the negative issues or any market change. That’s why using Bitcoin as a safe-haven can be a great solution.
- Bitcoin never goes down! Crypto asset markets are open 24/7. One can access to Bitcoin anytime.
- Bitcoin is built on scarcity: Nobody can increase the Bitcoin supply, scarcity is what makes Bitcoin valuable, somewhat similar to valuable metals, or rare arts.
In times of economic uncertainty, Bitcoin can play the role as a safe-haven asset while mainstream markets fall. The unique qualities like no centralization and not controlled by any bank or government make Bitcoin invulnerable to any economic crises. However, Bitcoin shares a great deal of characteristics with gold, the oldest continuously used form of money in the world. So, Bitcoin can potentially open another dimension for investors to hedge against financial crises.
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