While Bitcoin is becoming the preferred safe-haven asset choice of investors, every day the world is getting a step closer to 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 the 2008 financial crisis by an unknown person named Satoshi Nakamoto.
From the very first day till now, Bitcoin has gone a long way, from an economic experiment to globally applicable financial assets.
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 fighting 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 to laugh at this tool.
And now that Bitcoin has been the best performing financial instrument, we are into a fight!
Excuses are vast! Bitcoin has been criticized for numerous things like the 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. The 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 a “safe-haven” asset in times of economic crisis. This instrument has a few characteristics which will play as a safeguard against the volatility of a financial crisis.
Global Economic Crisis and Bitcoin
Despite the 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 decreased by 50 points. Though there is certainly speculation that, FED might cut rates 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 a 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 sign 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. when over ten years, we are back within the negative space.
GOLD and BITCOIN – Correlation of Safe haven asset
As global risks emerging, traders and investors are currently more concerned with 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 the upcoming financial crisis and probable stock and housing market crash again are leading the investors to GOLD as well. The 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 assets to shield them from risks and global economic devaluation.
Why do people invest in BITCOIN?
Most of the Bitcoin investors are actual opposition to the current global financial system. They believe that as long as central banks have the ability to print money, inflation will keep on rising. Thus investors 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 crisis.
- Bitcoin is safe: An Investor/Trader can access to his Bitcoin wallet from anywhere on the planet. They will only need access to internet through WIFI or mobile data. That’s it, now anyone will be able to purchase, transfer, make payment through Bitcoin.
- Bitcoin has a store of value: Bitcoin can easily used as a universal store of value.
- 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.
In times of economic uncertainty, Bitcoin can play the role as a safe-haven asset while mainstream markets fall. The unique qualities like decentralization and not controlled by any institution make Bitcoin invulnerable to any economic crisis. However, Bitcoin shares plenty of characteristics with gold, the oldest continuously used the form of money in the world. So, Bitcoin can potentially open another dimension for investors to hedge against financial crises.
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