The Narrative That Bitcoin Is a Safe Haven Asset Should Stop
By: Viktor Tachev
Tags: Investing, Bitcoin, Crypto, Cryptocurrency, Investment

A safe haven asset is best tested in situations where the broader market is going down, and the economy is distressed. A glaring example is the Global Financial Crisis. However, at the time, Bitcoin was just going live, which takes it out of the picture.

The next major event that fits the bill is the current situation we live in — the COVID pandemic.

On paper, the pandemic is an example of a global and market disaster that should trigger a surge in Bitcoin’s price, if it, indeed, is a safe haven asset.

In reality, Bitcoin tanked over 50% in just a few days after the WHO declared the situation a pandemic. The S&P, for the same period, fell by 20%.

The question is, what kind of safe haven asset surpasses the market’s drop by a factor of 2.5 when it is supposed to hedge your portfolio?

The reason for the freefall was that investors rushed to liquidate alternative assets like cryptocurrencies and gold to meet their market obligations and build a pile of cash.

According to Coinbase, the main contributing factor was the high amount of leverage in the Bitcoin market. Others refer to the immaturity of the market and the fact that speculative traders and arbitrageurs can hardly correct prices during market turmoils, which further deepens the crisis.

No matter the excuses we bring, the truth is that Bitcoin performed worse than all safe haven assets, including gold, sovereign bonds, and the USD. The majority of these showed a positive performance or remained flat to marginally down.

The most important characteristic of a safe haven asset is its ability to “weather the storm.” In the case of Bitcoin, however, it often is the storm. Or a shelter with a leaky roof, at best.

To further complement the analysis, we should mention that Bitcoin’s price is also dependable on a whole industry. This means its equation has many variables, each capable of triggering mini downturns.

A trading venue going down, a cryptocurrency ban in certain jurisdictions, an exchange hack — these are all theoretical scenarios where Bitcoin’s price can nose-dive. And the historical records have plenty of examples to back this up.

But let’s move to the other aspect that differentiates Bitcoin from safe have assets — its correlation with the market.

To adequately balance and hedge a portfolio, a safe haven asset should be uncorrelated with the other constituents. Highly-diversified portfolios require high-quality safe haven assets.

If we look at markets’ history, we will see that Bitcoin has continuously moved in line with the overall market sentiment, and inversely, only several times.

For example, during the COVID pandemic, it exhibited a positive correlation of 0.6 (and growing) with the global equity market.

BTC and the S&P 500, Source: TradingView

Analyzing things by looking in the rear mirror rarely brings any value to the investor because it often fails to help figure out how to navigate the next crisis.

However, it helps understand past events and the way the market has responded. We need that to maintain stability.

The assets that have been stable in the past have much higher chances of replicating that performance in future crises than those who have a history of being shaky.

Why the Desperate Need to Declare Bitcoin a Safe Haven Asset?

In terms of being storage of value, Bitcoin has proven to be immune to interest rates changes or currency debasements due to its decentralization. Although this is a good start, there is a lot more to it.

For example, it should be able to resist trade tensions, geopolitical forces, and overall market turmoil caused by different tail events.

Safe haven assets have become such because of investors’ trust. If there is a big enough investor base to show faith in the asset in times of turmoil and help shape the sentiment that Bitcoin will preserve and grow its value when things got ugly, then this will, indeed, start to materialize. Slowly, but steadily.

Safe haven assets also are matured markets. Bitcoin, on the contrary, is just over a decade old. Assets that are now considered safe haven have established themselves as such over a significantly long period, lasting decades or even thousands of years. This means the Bitcoin market should mature and expand first. Alternatively, to become accessible to more investors. And not only retail ones, but institutional and large-scale, as well.

We are talking about broader use-cases, not just buying coffee with Bitcoin. Think of whole countries with currency instabilities and economic distress, like Argentina or Venezuela, for example, who decide to adopt Bitcoin to shift their model. Or central banks looking for new types of reserves. Such mainstream adoption and growing usability will also help tame volatility and maintain stable prices.

For example, with gold, central banks have been buying it as a strategic investment and a reserve asset, which has contributed positively to the precious metal’s price stability.

For now, to many fund managers, Bitcoin is just a collectible and a way to speculate. It is safe to say that such kind of understanding is quite outdated as the asset has solid fundamentals and a real use-case, albeit still a bit limited. However, this isn’t enough to make it a safe-haven asset. For now, Bitcoin is a revolutionary asset with the distant potential to be a safe haven one. Nothing more.

We should stop comparing it to other safe haven assets because it does Bitcoin no good.

To be comparable to bonds, it should generate a risk-free return.

To be comparable to gold, it should have a reverse correlation with the market.

To be comparable to the USD, it has to have a broader use-case.

The real reason why we want to declare Bitcoin a safe haven asset so badly is just that we hope there is something that can generate huge profits and serve as a storage of value at the same time. Alternatively, to benefit from its volatility, but also to cut the associated risks.

If we ever have that, we would basically crack the code of the investment world and solve financial markets.

It’s Not On the Cards

As Bitcoin investors, we all want it to become the Holy Grail of the investment universe. Unfortunately, this takes more than just wishful thinking.

Bitcoin indeed shares a variety of safe haven assets’ traits. Numerous progressive projects in the industry, engaged and ever-growing community, interest from retail and institutional investors, and the stellar technological idea and execution — these might let you think that the ultimate safe haven asset is right in front of us. But it isn’t.

The reason — Bitcoin wasn’t designed to be a safe haven asset in the first place. And trying to force the narrative won’t make it either.

Just the opposite, it might prevent investors from understanding Bitcoin’s core philosophy — to be a universal P2P electronic cash system.