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Bitcoin has been on a rally reminiscent of the late 2017 Bull Run of late. That, alongside the fact that the US is in and off trade war with China, bodes really well for Bitcoin as a store of value. Apparently not, at least if are willing to rely on the opinion of Dovey Wan, director of CoinDesk Advisory Board.
Many feared that Bitcoin would forever lose its mojo after the 2018 bear market. However, the consistent uptick in prices in the past two months has returned much-needed confidence. Is it time to class Bitcoin as a “safe-haven investment” yet?
Safe-Haven Assets
This is a term that essentially refers to stable assets relative to legal tender with market changes. The common safe asset investment include: USD bonds, Swiss Francs, gold among others.
At the moment, the USD has generally been a safe haven and an asset investment also across the world. This is because the currency is an established standard with majority of the world’s petroleum priced in USD. Even after the 2008 financial crisis, the USD quickly regained the position as stable currency.
The gold standard has traditionally been a great safe haven asset. Notably, the USA got a significant amount of world gold reserves following World War 2. This gave the dollar stability even after USA dropped the gold standard in the 70’s.
As such, it is clear that the USD established its reputation over decades if not centuries. Is Bitcoin really on the verge on usurping this? Dovey Wan certainly contends to the contrary.
Liquidity Fragmentation
At the moment, Bitcoin has an impressive market cap of $181 billion which is at the level of major companies like Intel and Boeing. The 24 hour trading volume is certainly better than the stock performance of these companies. However, reports of liquidity problems in some major exchanges leave much in question. This has led to closure of Bitcoin futures products by the CBoE.
The liquidity fragmentation makes analysts like Dovey Wan call Bitcoin immature. The value and the liquidity fragmentation of the coin makes are insufficient to bear its “safe haven” demand. Trading options, like block trades, are obviously unpredictable as would be for a true safe haven asset.
Asset Correlation
Moreover, you will realize that there is little correlation between bitcoin prices and high-risk assets in traditional finance. Bitcoin has certainly operated independently in the financial world. This is because major events like the Federal Reserve interest rate cuts in January had no impact on prices. This means that Bitcoin cannot be a safe haven investment to counter macroeconomic shocks in the system. Prices of other safe haven assets like gold go up in times of crises and Bitcoin does not match up. Bitcoin has self-sovereignty but seemingly operates in a separate financial world.
Bitcoin has its own volatility to contend with. This is not a trait someone would rush to by any stretch as a safe haven. As such, the speculative issues make the coin a problematic safe haven.
Instead, Bitcoin can be more of a hard asset independent of institutionalized power. This is for those who want investments out of the reach of authorities. Alternatively, it is an investment much like any other speculative commodity. All in all, Bitcoin has to display more consistency and market alignment to be a true safe haven investment.