Bitcoin’s safe-haven status falters - OhNo "WTF" Crypto

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Bitcoin’s safe-haven status falters

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As many countries around the world suspend school and work, the Coronavirus crisis has become not only a healthcare challenge but also the economic disaster feared by many investors. On March 12th, Bitcoin crossed below $4,000 hitting a 12-month low as global investors fled to cash in all markets.

Is Bitcoin a safe haven asset yet?

When stocks sold off in August 2019, many commentators argued that Bitcoin had become a safe haven asset based on the negative correlation between Bitcoin pricing and the S&P. However, since the birth of Bitcoin, the market hasn’t experienced a panic-driven real sell-off like the one we saw this week. The Coronavirus crisis is the first true test of whether Bitcoin can be used as a safety net and so far the answer is no.

Safe-haven assets are used by investors to weather tough market conditions. These assets have one common property that makes them unique – they increase in value when the stock market is volatile. US Treasuries are one example of a safe-haven investment. These bonds are backed by the credit of the US government, and therefore investing in Treasury bonds is considered one of the safest investment options in the world.

Now, let’s compare the performance of Treasuries and Bitcoin during the COVID-19 crisis. As of March 11th 2020, we have had 48 trading days so far. The S&P posted losses on 24 days. Out of that 24 down days for the S&P, Treasuries went up for 22 days. This means that when stocks sell off, Treasuries have a 92% chance of rallying as a result of investors fleeing for safety. In comparison, Bitcoin only went up 10 out of the 24 losing days for the S&P (42%). While Treasuries benefit from market volatility, Bitcoin pricing is negatively affected by the spillover market risks. From this perspective, Bitcoin is not yet a safe haven asset that investors trust during highly volatile markets.

Why did Bitcoin sell off this time?

Pointing out that Bitcoin’s recent crash is due to flight-to-safety is not satisfying. The real question is why the Coronavirus crisis is different from the other corrections we have seen so far.

Many down markets we have seen since 2008 were driven by demand-side shocks. Demand-side shocks affect how much money the consumers spend. High unemployment rates, subprime credits, or increasing tariffs mean that consumers are less willing to spend their money. To counter demand-side shocks, governments make money cheaper and more available to everyone with monetary and fiscal policies. Bitcoin tends to benefit from demand-side shocks and has been used as a hedge for weak economies.

However, the Coronavirus is not a demand-side disruption. Consumer demands are still strong. In fact, many are piling up their shopping carts right now. But the supply of consumer goods and materials has been on the decline due to factory shutdowns in China and now other countries. With the disrupted supply, the total production will decrease as a result. This makes the Coronavirus crisis unique. So far, we have seen investors moving money out of Bitcoin as a response.

Can rate cuts help?

When the market is in turmoil, investors expect the Fed to save the day. The Federal Reserve has a few tools it uses to stimulate the economy. One of them is rate cuts. By cutting rates, the Fed makes money more available and borrowing cheaper. Easy money allows consumers to spend more and for companies to expand. However, monetary policies are not effective against supply-side shocks like the Coronavirus. Having more money doesn’t help consumers buy more face masks or medication when there is no supply. Cheaper borrowing rates also can’t help companies who are waiting for raw materials and parts. This is why the rate cut last week did very little to reduce market volatility.

Both Bitcoin and stocks sold off despite the emergency rate cut last week. As the Coronavirus crisis continues to develop, we are likely to see more cuts from the Fed and central banks around the world. Unfortunately, reducing the interest rate will remain ineffective in reducing market volatility.

What will happen to Bitcoin now?

While the spread of the Coronavirus presents many uncertainties, a few factors could help support Bitcoin pricing once the dust settles.

First, safe-haven assets are becoming extremely expensive. Right now, the entire Treasury curve is below 1.5% with the 10-yr yield at 0.77%. If the market continues to experience volatility, gold and Treasuries will become even more expensive. As a result, investors will be forced to seek alternative assets that are cheaper. With its lowered valuation, Bitcoin could benefit from an extremely crowded Treasuries and gold market going forward.

Second, Bitcoin thrives when people lose faith in the financial market and central banks. In the coming months, we are likely to see further rate cuts from central banks around the world. If they fail to deliver results, we might see more investors moving their money to alternative currencies such as Bitcoin.

Lastly, the Bitcoin halving is just around the corner. If we look at the historical relationship between Bitcoin pricing and halving, after each halving Bitcoin has received a price boost. The current crisis has impacted the bullish halving thesis in the short term, but the incoming supply shock to Bitcoin remains one positive indicator in the current market despair.



Kehan Zhou, Khareem Sudlow