Bitcoin at turbulent times: a test for the digital gold

When the stormy times come and markets get turbulent, it’s in everyone’s need to find a place where money can stay secure.

This is why lots of investors turn from risk assets to the safe havens, the financial assets that help to protect themselves or even profit from the period of market turmoil. Historically these assets have been conceived as gold, diamonds, cash or government bonds. But as the times change, the new instruments come into account, one of them being a digital gold.

Bitcoin has long been referred to as digital gold due to its decentralized nature and weak relationship with traditional assets, such as stocks.

However, the recent crashes in global financial markets, both crypto, and traditional ones have sparked the debate over whether Bitcoin really is a safe haven.

Non-correlating asset

To understand why Bitcoin suddenly falls down together with the stock markets and oil prices, it is necessary to turn back to its interaction with other assets.

The correlation is an important statistical measure here, as it determines how assets move in relation to each other. Assets can be positively correlated as they move up or down in tandem, or negatively correlated when one of them moves up while the other goes down. When the correlation coefficient is equal to zero, both assets are statistically completely independent.

Here comes an interesting moment. Although Bitcoin is of increasing interest to financial market participants, it tends to show no correlation with any traditional risk assets. According to Nasdaq report, Bitcoin continued to present itself as an uncorrelated hedge to macro-financial assets during 2019:

Bitcoin’s price movements are largely uncorrelated with both gold and the S&P 500, something that should make it attractive for risk diversification

The analysts from Data Trek Research suggest, the correlation between digital assets and risk assets like stocks, might be highest when sentiments, not fundamentals, drive the moves in the financial markets. Nicolas Colas, a co-founder of Data Trek Research, previously told the Wall Street Journal, that “the correlation is strongest when both Bitcoin and stocks are falling.”

Looking at the recent events, when gold prices are hitting the heights not seen in the last seven years and stock markets are crashing, bitcoin shows signs of positive correlation with the latter as crypto markets suffer nearly 10% losses.

The important fact here is that bitcoin emerged after the major global financial crisis and until now has never been tested in a macroeconomic panic environment.

Analysts on the debate

Although there is no consensus about crypto assets maintaining the current safe-haven status, the market analytics tend to stay positive, show the latest survey of Forbes.

Denis Vinokourov, head of research for London-based digital asset firm Bequant believes the main cause of bitcoins decline is “broader market and liquidity event”, which can be translated as a typical exit strategy, where entities are converted to cash. He states that:

However, a liquidity event in equities will likely translate into worsening liquidity conditions in crypto because market participants will be forced to adjust their portfolios and deal with margin calls, alternative assets are unlikely to be prioritized.

Another expert Michael Conn, the founder of financial service firm Quail Creek Ventures, agrees that liquidity crunch is to blame for the current crash of the markets. Meanwhile, he sees Bitcoin as a “safe haven asset when the fundamentals come back into the market.”

According to Joe DiPasquale, CEO of cryptocurrency hedge fund manager BitBull Capital statement, “Bitcoin is positioned very well to be a safe-haven asset.” In his opinion, recent declines in both cryptocurrency and stock markets “merely represent a general risk aversion going into a possible economic crunch, and does not necessarily invalidate Bitcoin’s safe-haven status.”

Meanwhile, Evan Kuo, CEO and co-founder of digital currency firm Ampleforth took the opposite view that Bitcoin is not yet a safe-haven asset. According to him, Bitcoin stays “an uncorrelated risk asset, which is important to distinguish from a safe-haven assets.”

As the experts agree that Bitcoin has the strength to become a safe haven asset like gold, it seems that the world’s leading digital currency still has to train its muscles in terms of resistance to the market turmoils. While similarities exist between gold and digital gold, gold has been recognized as a store of value for millennia. Bitcoin has been recognized as a store of value for less than a decade, the experts conclude.

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