There have been recent discussions and public articles, given the rise in Bitcoin’s price over the past year and the deteriorating conditions in the global economy, about investing in Bitcoin as a safe haven asset. The question remains whether Bitcoin can be classified as a Safe Haven asset yet? Generally there are four criteria associated with safe havens: Liquidity, Stability (including political and economy), Volatility, and finally a suitable Hedge to global risk. Most investors consider assets like Gold, US Dollar, Swiss Frank and the Japanese Yen to match some of the criteria above and classify as a safe haven. How does bitcoin fare?
Firstly, all traders can agree Liquidity in Bitcoin has increased dramatically over the past 2 years. Having said that, turnover is still less than most listed companies, and comparing volume to the above ‘safe-havens’ just doesn’t make sense. Over 95% of volume in the last 6 months was also done in XTCCNY. Whether or not volume on those exchanges can be properly audited is another question. For serious investors to consider an investment in Bitcoin, liquidity is going to be an issue given the current market-impact cost for their investments.
Looking at ‘Stability’ next, Bitcoin is a decentralised asset that is not backed by anything other than math which only works under the consensus among all users. There can be no government intervention or capital controls imposed. Furthermore, the purchasing power of Bitcoin is better preserved given the finite supply of coins as opposed to a currency backed by a swirly-bird in the sky making it rain. This makes Bitcoin appear like Gold. However, these benefits also give rise to the demise of Bitcoin. That being the Gox-effect and the number of exchange defaults with no recourse to the holders. Whether or not Bitcoin would ever replicate an ETH hardfork remains to be seen. As such, this is the difference to Gold.
Volatility. Well we are all aware of Bitcoin’s volatility and that is what we love about it. Having said that, extreme volatility is likely to deter large investments into the cryptocurrency given the uncertainty of where the value will be long term. I remember working at Deutsche Bank and how almost impossible it was to get any approval from the Risk department for structured products involving commodities such as WTI and Coal, where a normal vol would be around 40%. with Bitcoin recently jumping to an annualised vol of 90%, I can only imagine professional investors having automatic replies from Risk banning it.
Finally, how well does Bitcoin fare as a hedge to global risk? This is still up for debate given how ‘random’ some moves can be. Having said there, there were clear positive moves during the Greek crisis and more recently with Brexit. In addition, a majority of Chinese could be said to be escaping a hard landing in China by moving their cash out into Bitcoin. Whether they are then converting into USD or holding Bitcoin as a safe-haven is another question.
Overall its a mixed bag and not as clear-cut as safe-havens such as Gold, USD, CHF or JPY. Increasing volumes in Bitcoin do suggest that we are moving in the right direction, and increased liquidity should help solve issues surrounding extreme volatility. The one issue is whether or not increased flow is because of wants of a global hedge or on expectations of further price appreciation. The latter is more likely to bring Bitcoin back into the ‘Bubble’ state and detract from the view that it is to be regarded as a safe haven asset.