What’s happening with Bitcoin?
In our previous article, we have slightly touched upon the recent rise of Bitcoin and made the case that you should not invest in Bitcoin only based on Libra’s announcement, in hopes that it will have a significant long-term impact on the currency. Since then, Bitcoin has significantly dropped in price. Before the drop happened, more and more people have come out to say that Bitcoin is becoming a safe haven asset. Is that still true today, after the drop? Or does it have no relevance, and Bitcoin is still bound to become a safe haven asset in the future?
Why is this important?
Assets, such as gold, Treasury bills, the US dollar or the Swiss Franc have long been thought of as safe haven assets. They usually rise in value when there is market turmoil, and investors search for alternative investment destinations. Is Bitcoin already, or is becoming a safe haven asset? Let’s try to find out.
You might have seen charts such as this somewhere on the internet:
Or this one:
This basically tries to illustrate that as yields go down, or as there is more and more negative-yielding debt, the price of Bitcoin rises. Since yields going down mean bond prices rising, there is a correlation between Bitcoin and Treasuries (which are a safe haven asset). Hence, Bitcoin is also a safe haven asset.
Well, we all know what happened since then, as the price of Bitcoin dropped by about 25% within a day. So, it’s probably clear that Bitcoin cannot be called a safe haven asset, right?
This subject is much trickier than it seems because there is no one definition of safe haven asset, as some investors see it as those investments with less volatility than the general market, others see it as having a negative correlation with the equity market, and yet others simply say it’s the asset that attracts investment in times of turmoil.
Let’s start with the first one: does Bitcoin have less volatility than the general market, or similar to that of gold or cash?
Just looking at the chart showing 1-year volatility of different asset classes, with a few exceptions, probably not.
Okay, then how about correlations? Does it have a negative correlation with the stock market? And also, do other safe-haven assets such as gold have a negative correlation with equities? Let’s find out:
As we can see, the correlation between Bitcoin price in dollars, and S&P500 has changed over time, with it mostly being positive. How about gold vs S&P500?
As much as we’d have to admit it, for simplicity reasons, gold also does not have a constant negative correlation with the equity market.
Well, then does Bitcoin rise in value in times of turmoil? According to this FT article, it was noticed that the Bitcoin price in hotspots of political turmoil such as Tehran or Hong Kong has indeed risen significantly.
As we can see, the answer to our initial question is mixed. One thing we can say for sure is that it is probably much too early to say. Bitcoin’s market value is just around $200bn, with only 17.8 million bitcoins in circulation, while M1 (a thin measure of the money supply) in the US stands at $3.8 trillion, and M2 is at $14.7 trillion. The market is still in its infancy, however, in the long term, and especially in smaller countries, if it grows in popularity and hence has smaller value fluctuations, it does have the potential of becoming a safe haven asset, as it is separate from the control of the governments in terms of monetary policy.
The price of Bitcoin in US dollars is currently trading at the closest resistance level. The closest support is at $10600. RSI is in the normal range, at almost 61.