Bitcoin’s safe haven narrative blurs following price drop

Posted: 28 February 2020 5:33 pm
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Does Bitcoin need to get its story straight, or can it just keep on trucking?

One of the most longstanding Bitcoin narratives is that it's a safe haven asset. Specifically, this idea that it will retain or grow in value during times of trouble, as investors flock to the alternative asset in the hopes of protecting their wealth.

That was well and good when prices were rising during the Covid-19 spread, although the narrative was questionable at best. But as virus concerns intensified and dragged down the stock markets, Bitcoin plunged too.

After reaching a recent low of $8,500, Bitcoin grappled back up to about $8,800, where it's still sitting at the time of writing. Gold remained largely unchanged and retrospection began.

Correlations and narratives

Whether this trend is enough to say Bitcoin has failed as a safe haven asset is open for interpretation.

On the one hand, gold is a safe haven and Bitcoin's correlation with gold actually appears to have weakened this year.

On the other hand, it's perhaps not so cut and dried. In part, because Bitcoin's entire existence has always been aspirational and forward-looking, and just about everyone currently holding it is doing so with the expectation of something happening in the future, rather than because of what they get out of Bitcoin today.

As the stories go, the Lightning Network will be widely used someday, Bitcoin will be scalable someday, everyone will use Bitcoin, and Bitcoin will become widely used if and when fiat collapses on itself. None of those has happened yet, but they're all integral parts of Bitcoin's value proposition and they're all baked into its value.

If you assume none of those things will happen, buying Bitcoin probably looks like an extremely bad idea to you. If you assume some or all of them will happen, your outlook may be different. As such, all the people who are buying Bitcoin with the expectation of it being a safe haven in the future, may be contributing to it acting like a safe haven today.

That it doesn't appear to be acting as a safe haven suggests, perhaps, that the aspirational safe haven isn't as strong as some of the others.

That said, Bitcoin doesn't necessarily need to correlate with gold to be a safe haven. A good safe haven asset arguably just needs to not drop in times of trouble, rather than actively rise. Bitcoin price movements are largely uncorrelated with, well, everything.

As Chamath Palihapitiya recently said on CNBC:

"I don’t think when you wake up and see a coronavirus scare and the Dow down 2,000, you should not be going in and buying bitcoin. That is an idiotic strategy."

"I think a reasonable strategy is to say 1% of my net worth should be in something completely uncorrelated to the world and how the world works. You quietly over some period of time accumulate a position and then just never look at it again and hope that that insurance under the mattress never has to come due. But, if it does, it will protect you."

It's clearly a stretch to say Bitcoin is a safe haven asset the way gold is, but as an asset that tends to be uncorrelated with everything, it may also be a stretch to say it's not a safe haven asset in any sense of the word.

How closely it hews to gold prices in the future may depend on which narrative is running most strongly.



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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