Is Bitcoin Really A Safe Haven Asset? It all depends on what type of risk you are trying to hedge against.
Philosophically speaking, Bitcoin is an asset outside of government control, federal reserve manipulation, and/or individual ownership. It would seem that Bitcoin should act independently of the traditional financial system. However, recently we have seen many examples that don't entirely support this claim. So what is going on?
When Does Bitcoin Act As A Safe Haven? Systematic Risk:
The best use of Bitcoin as a hedge would be to protect against overall systematic risk. Specifically, the collapse of major world currencies like the US Dollar, Euro, or Chinese Yuan. In 2008, during the Great Recession, trust in the US dollar was severely weakened and people around the world began losing confidence in its value. In other words, there was fear that the US Dollar may collapse. It is situations like this that people will look to a non traditional asset class like Bitcoin as a safe haven hedge.
What About Bitcoin As A Safe Haven Against Inflation?
Inflation is quietly and consistently eroding the value of the US Dollar. A good economy can only hide the erosion for a while but eventually there will be enough erosion to cause major problems. In other words, Inflation is eventually going to lead to systematic risk. Bitcoin was specifically created to avoid this kind of erosion and will be an asset that people will be able to use when traditional financial systems cannot be trusted or relied upon anymore.
A Couple Examples Of When Bitcoin Has NOT Been A Safe Haven...
1) Coronavirus: Last week the stock market crashed hard for 3 days in a row, and took almost every other asset class down with it, including Bitcoin. So why didn't Bitcoin act as a hedge against a crashing stock market? This was a black swan event that didn't directly threaten the perceived value of the Dollar. In other words, the stock market crashed because it was clear that productivity was going to be impacted, not because people thought the Dollar is becoming worthless.
2) US - China Trade War: In 2019, the trade war between the US and China caused a drop in stock market prices. Bitcoin prices also dropped. Why? The trade war impacted the stock market because the cost of importing/exporting goods was going to be impacted in the marketplace, not because people thought the Dollar was weak or in trouble.
Another Reason Bitcoin Hasn't Behaved Like A Safe Haven...
Investors are still the largest purchasers of Bitcoin. Therefore, when the stock market goes up, or down, the investors that hold Bitcoin respond accordingly. They are trying to make profit...not keep their money safe.
Bitcoin provides a safe haven alternative that most people don't know they need yet. It is a great hedge against systematic failure but not necessarily against normal market corrections. Many investors can see the value that Bitcoin offers, while the average person blindly trusts the traditional financial system. On the surface, everything seems to be working well, but underneath the surface there is dangerous erosion to the foundation called inflation. When the time comes for major financial collapse...Bitcoin will be there as a safe haven.
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