It seems like not a day goes by without bitcoin hitting the headlines – either for its meteoric rise, unrivalled volatility, or sudden and frequent crashes. And no matter which way its price moves, nothing can seem to quell the heated debate between bitcoin fans and opponents.
What has been interesting to witness over recent months is that a consensus has seemed to grow on what bitcoin actually is, with many analysts gravitating towards the idea that bitcoin is a store of value, a safe-haven asset that many are calling “the digital gold”.
What Are Safe-Haven Assets?
A safe-haven asset is a financial instrument that investors will expect to retain, or even gain value during periods of economic decline. These assets are normally uncorrelated with the economy as a whole, and can often be negatively correlated, meaning they tend to appreciate during an economic downturn.
How Is Bitcoin Similar To Gold?
After Ray Dalio coined the term in 2017, several leading economists have now begun to describe bitcoin as the “digital gold”.
Larry Summers, former US Treasury Secretary, said recently:
“Gold has been a primary asset of that kind for a long time. Crypto has a chance of becoming an agreed form that people who are looking for safety hold wealth in. My guess is that crypto is here to stay, and probably here to stay as a kind of digital gold.”
Bitcoin is similar to gold in several important ways. Like gold, bitcoin has a predefined, limited supply, making it a scarce commodity. It is also durable, meaning it cannot be easily destroyed or altered. In addition, bitcoin is easily transactable and can be delivered between parties with relative ease.
Recently Jerome Powell, Chairman of the US Federal Reserve, said that bitcoin is “essentially a substitute for gold, not the dollar”.
In essence, the raging debate about bitcoin’s intrinsic value is irrelevant. Just as with diamonds, gold and even stamp collections, bitcoin does not, and probably will not, be used for cash flows. Rather, it is considered a “store of value”.
The Digital Gold Myth?
Recently, events have unfolded that have starkly challenged the “digital gold” theory. The events of the last few days have not been great for proponents of bitcoin as a safe-haven asset.
Global markets found themselves in turmoil when the Chinese developer Evergrande, which is snowed under by debt totalling a crushing $300 billion, announced that it could no longer meet debt repayments, sparking fears across the world of global market contagion.
Immediately following the news, traditional markets like US stocks fell across the board, and BTC followed suit, dropping nearly 20% in the hours that followed. Even though bitcoin looked starved of bullish momentum during the first couple of weeks of September, the collapse still took the community by surprise.
So what on earth happened to bitcoin’s claim to be a premier safe-haven asset? In times like these, a store of value is meant to float above the rising tides, not sink like a rock.
In truth, digital currencies, in general, tend to drop during times of increasing macroeconomic risk. A similar outcome has played out during the Evergrande crisis, with bitcoin and crypto seemingly more correlated with energy and stocks than gold or traditional safe-havens.
Recent data also suggests that bitcoin is increasingly correlated with the S&P 500 and the Dow Jones indices. To drive home the point, gold performed extremely well during the same period.
The precious metal acted exactly as a safe-haven asset should, preserving its value amidst the carnage that surrounded it, even rising by a minor 0.5% as a small gesture of its status.
The arguments being made were that Bitcoin is turning out to be a better store of value than gold – not on this evidence. At this moment in time, Bitcoin’s characteristics align more closely with that of a risk asset. When global market turmoil hits, bitcoin continues to face volatility and sharp downturns.
It should be noted that the latest downturn was mainly driven by the spot market. Hence there is always the possibility, as Bitcoin enthusiasts will be quick to point out, that the cryptocurrency will recover quickly on the charts, just as it has done so many times in the past.
Which Are The Traditional Safe-Haven Assets?
So if bitcoin is – for the sake of argument – just an impostor in the safe-haven space, which are the other safe-haven assets that traders may reasonably expect to turn to in times of recession? Let’s take a look at the most popular SoV assets:
When people think of safe-haven, they think of gold. Gold is a physical commodity not easily influenced by central bank decisions or interest rates, and its supply can’t increase by actions such as printing.
Following the 2008 global recession, the influx of investors caused gold to rise by nearly 25% in 2009 alone, and the precious metal continued its upward trajectory all the way into 2011.
For more than 50 years, the US has held its own as the go-to safe-haven during economic downturns. It exhibits many characteristics you would expect of a safe haven, the most crucial being that it is the most liquid currency in the FX market. It represents the world’s largest economy and essentially acts as the world’s reserve currency.
Even as many analysts predicted that the dollar’s safe-haven status would be undermined by the controversial policies of the recent president Donald Trump, it seems that the greenback is still benefiting from safe-haven flows. During the tumultuous presidency, the US dollar saw an increase of more than 5% across the board, even as trade tensions wreaked havoc across stock markets and commodities.
The Swiss franc often appreciates when the global stock market shows signs of stress. There are several reasons that investors favour the Swiss franc, including Switzerland’s political neutrality, its strong economy, and its developed banking sector.
Its independent status from the EU has also bolstered its status as a safe haven when negative political and economic factors at work in Europe occur.
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