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Bitcoin Proving Anti-Fragility in 2020

What do Bitcoin, gold, and other risk-off assets all have in common?

Bitcoin market commentary october 1

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Bitcoin’s price appreciation in the face of strained sovereign relations supports a risk-off asset thesis rather than a safe haven.

Bitcoin on the Move amidst International Tensions

The recent rally in Bitcoin’s price has largely been attributed to the rising tension between the United States and Iran. 

The latest jump aligns with President Donald Trump successfully taking out Iranian military general Qaseem Soleimani. This has revived the thesis amongst the crypto community that Bitcoin is indeed a secure alternative to traditional economic systems. 

Source: TradingView

Albeit far from ideal, the market has once again shown it values Bitcoin for its ability to serve as a political hedge in distressing times. 

In early 2019, the trade war between the United States and China was at a peak. A report from Grayscale notes that Bitcoin was also the best performing asset during this time period, with returns that exceeded prominent risk-on and risk-off assets such as the S&P 500 and gold respectively. 

The leading cryptocurrency has a tendency to flip bullish as the outlook for global economic growth and political harmony dwindles. Despite its recent correlation with gold, there is reason to believe Bitcoin is not a safe haven asset but, rather, a risk-off asset whose prosperity is noticeable during troubling times. 

As the atmosphere around the trade war with China began to simmer down, and a resolution inched closer, prominent analysts in the space expected Bitcoin to perform as a risk-on asset that would move in line with the stock and bond markets. 

In an interview with TD Ameritrade in Oct. 2019, Kevin Kelly, co-founder of Delphi Digital, promoted this narrative:

“This broad-based currency devaluation narrative is a tailwind for risk-on assets. So you could see Bitcoin rise with risk assets as liquidity gets injected back in the market as, maybe, money supply increases, as opposed to the summer (of 2019) when Bitcoin traded more in line with safe havens like gold and treasuries.”

Kelly noted this was just a theory he believed would play through. And while his calls for currency devaluation in emerging markets were correct, it ultimately led to a stronger dollar, which hindered Bitcoin’s ability to appreciate. 

Barring an explosive reaction to Chinese Premier Xi Jinping’s positive outlook on blockchain, confused as positive news for cryptocurrencies – to which the government is still vehemently opposed – Bitcoin has underperformed relative to other risk-on assets.

Even now, in the aftermath of escalated tension, global stock markets fall and Bitcoin rises as investors grow weary. There may be brief periods where Bitcoin makes moves that are correlated with traditional assets, but it is unlikely to sustain over extended periods of time as it continues to move as a risk-off asset.

Bitcoin Is Not a Safe Haven Asset

A safe haven asset refers to a vehicle that investors flee to during times of economic slowdowns and war. Not all risk-off assets are safe havens. Bitcoin has far less liquidity than traditional safe havens like gold and sovereign bonds — specifically United States treasury bills. 

Considering its true aim is to serve as a substitute for banking, it makes sense that the market sees Bitcoin favorably when the financial status quo is threatened. However, pointing to this as proof of Bitcoin’s status as a safe haven is flawed. 

Bitcoin saw a high correlation with gold for a brief stretch in May – Aug. 2019. During this period, correlation reached a high of 0.827; the long term correlation between the two assets has historically stayed below 0.15.

Correlation between Bitcoin and gold, courtesy of Coin Metrics

As the digital gold and safe haven narrative continues to gain traction, it could very well conjure itself into existence. 

But as it stands today, Bitcoin is a system that empowers those ousted by the banking system — either for a lack of funds or for trivial reasons. 

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