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Bitcoin Safe Haven Asset Debunked

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This week saw heavy losses for bitcoin with sudden price drops seeing the cryptocurrency losing more than 20% of its value in a matter of hours. The dramatic dive comes after months of sustained price growth where Bitcoin went from below $7,000 at the beginning of the year to just over $10,000 by the end of February. 

The recent drop calls into question Bitcoins merit as a safe haven asset. Global fears over the fallout of COVID-19 has lead to Bitcoin trading in tandem with the stock markets and generally behaving the same as a risk-on asset. 

The Safe Haven Theory

Proponents of the theory point to Bitcoin’s track record in the face of past global turmoil. The historical trend is that Bitcoin generally benefits from periods of economic uncertainty, hyperinflation, and geopolitical crises. Quite fitting since Bitcoin was created during the 2008 global financial crisis as a response to the instability of traditional banking institutions.

Bitcoin is also extremely popular in countries with unstable currencies, most notably, Zimbabwe and Venezuela. Hyperinflation in these countries has historically correlated with a boost in the price of Bitcoin.

In 2013, Bitcoin experienced a bull rally as it soared 1,950% during the Cypriot financial crises. 

The middle of 2019 saw U.S. and China tensions escalate in a trade war seeing Bitcoin once again surge from $6,500 to just below $14,000.

In early January, Bitcoin soared from just $7,000 to almost $8,500 just as the U.S. and Iran relations reached boiling point, with U.S. airstrikes on Baghdad and Iranian retaliation strikes on U.S. bases in Iraq. 

However, the latest dive seems to dispel this ‘safe haven’ narrative. Where Bitcoin once drew comparisons to gold, in that it offered a semblance of protection of wealth during economic uncertainty, the present COVID-19 crises paints a different picture. Is Bitcoin merely a ‘wartime safe haven’ instead of a true safe haven asset? 

Where to Next?

Bitcoin has not displayed the level of resilience expected by market analysts in the face of the global pandemic. The effects on Bitcoin prices have been severe. However, not as severe as other markets. While Bitcoin now seems to be trading in a similar trajectory as the stock market, this may be a result of the wide nature of the current sell-off. When global financial fear sets in, investors tend to sell off the riskiest assets in their portfolio and unfortunately for Bitcoin, the cryptocurrency fits the bill. 

Governments continue to react to the pandemic as borders are closed, infection rates rise and the tragic human consequences of COVID-19 mount. What is apparent, is that COVID-19 is a unique event that has truly taken the world by surprise and has started a domino effect across all markets. One view is that the downturn is a response to the huge disruption COVID-19 has made to the supply chain. What was initially considered as only a health crisis has now turned into a global production and inventory crisis, with the disruption to China’s manufacturing sector having disastrous effects reaching every corner of the globe. 

While Bitcoin may display qualities of a safe haven asset where the risk and uncertainty stem from poor government policies; what remains to be seen is how it will react in a state of market panic. The fear caused by the global pandemic of COVID-19 has been Bitcoin’s first true test, and at present, it seems to be faltering.