Crypto ≠Safe Haven (Feb 26th)
By: Guy Winterflood
Tags: Coronavirus, Gold, Finance, Bitcoin, Cryptocurrency

In times of crisis, when trust is skulking in the shadows and blood is on the streets it is, according to the 18th Century financier Baron Rothschild, time to buy.

He was referring, of course, to the contrarian view that the intelligent investor (apologies to Benjamin Graham) should accumulate when the mob is selling, and then embrace the corollary of selling when those same people have turned buyers.

In our current panic-stricken climate then, what lessons should we take from the performance of cryptocurrencies?

The coronavirus epidemic has caught financial markets on the hop. US equities were preemptively celebrating the coronation of Trump 2.0 as the Democrats committed slow-motion harakiri, when, all of a sudden, a Black Swan, literally straight out of a Steven Soderbergh movie, came in to land.

With the Dow Jones index flirting with the 29,500 level (only a 3.5 times increase from its lows just over a decade ago — who said we were a “now” society?) and precious metals gently ticking up one could have been forgiven for thinking that the strong performance of the crypto complex since the middle of last December was a sure sign that Bitcoin and co. had entered the investment mainstream.

Unfortunately they have been found wanting.

When the buying opportunities that Baron Rothschild sought come around it is the brave and the often foolhardy that prosper. They purchase from the crowd, deploying funds againt the liquidity of escaping, panicking sellers driven to take any cash for their fast dwindling paper wealth. When the screw really turns it is food, clothing and shelter (and often weapons) that attract the premium prices, but amongst the desperation portable, concealable and useful items also command a surcharge. The poster child of this asset class is, of course, gold (up 5% from the 12th Feb when the financial markets started to take notice of the virus’s economic impact).

One of the main tenets of crypto currencies was their separation from the established monetary system. On the basis that there is no centralised issuer or promissory, that is a given. Their other feature (bug?) was their ease of transfer and cloak of anonymity. In a world where a deadly virus can lurk on a surface, waiting up to 48 hours for a stray hand to brush by and inevitably infect its owner, surely a means of exchange that requires zero person to person contact, an asset that can be swapped via an internet link or simply traded using ones and zeros across the web should have more than held its own?

Unfortunatley crypto has failed its first major stress test. Neither crypto-forks nor “51% attacks” have made many ripples beyond the crypto cognosenti but surely the Coronavirus episode is tailor made for crypto to shine?

Gold jewellry needs to be touched, weighed, appreciated and all the while it might just harbour a naughty corona germ. Bank notes, rare books, tulip bulbs, miniature portraits and even tooth fillings have all been stores of value in hard times gone by, they all share that common bug (feature?) — physical items potentially harbouring the bug you just dont want.

In this climate then, we should expect Bitcoin and its relatives to fly, unfortunately they have done the opposite. Bitcoin is down almost 18% since the 12th of February, the Crypto 10 index of the largest market cap weighted crypto coins is down over a third.

Unfortunately the hunt goes on for investors looking for a state free, germ free disaster hedge.