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Why Bitcoin Might Not Be a Safe Haven Amidst Market Crash

Bitcoin is no longer a safe haven. In fact, this week’s market crash has proven that it never truly was. Because as markets tumble around the world, Bitcoin is tumbling in parallel. It dropped by 10% between Sunday and Monday, while gold — the original safe haven asset — rose to $1,670.

Dow Jones Industrial crash

The trading numbers are displayed on the floor of the New York Stock Exchange on March 11, 2020 in New York. - Wall Street stocks dove deeper into the red in afternoon trading on March 11, 2020, with losses accelerating after the World Health Organization declared the coronavirus a global pandemic. Near 1710 GMT, the Dow Jones Industrial was down more than 1,200 points, or 5.0 percent, at 23,777.17. The broad-based S&P 500 slumped 4.6 percent to 2,749.88, while the tech-rich Nasdaq Composite Index tumbled 4.4 percent to 7,979.15. (Photo by Bryan R. Smith / AFP) (Photo by BRYAN R. SMITH/AFP via Getty Images)

It’s likely that Bitcoin will continue to fall, as the world’s major stock markets reel from the effects of the coronavirus. And the more it falls, the more it will be harder to maintain the narrative that it’s a store of value. However, a range of studies and research has shown that Bitcoin does exhibit some of the behavior of a haven, so it’s still possible that it will retain much of its value in the longer term, even as markets continue to fall.

Bitcoin Sinks Below $8,000

In case you haven’t heard, world stock markets are having a bad time. The Dow Jones had its worst day since 2008 on Monday, falling by just over 2,000 points, to 23,843. Meanwhile, the FTSE 100 dived by 8%, while stock markets in Japan and South Korea fell by 5% and 4.19%, respectively.

In the past, many figures within and even without the crypto community have championed Bitcoin as a new kind of digital safe haven. Back in October, Business Insider ran a story quoting various traders who believed that the cryptocurrency was becoming a haven in the face of rising market uncertainty, given that its price movements had generally been uncorrelated with those of world markets.

And as recently as February 24, cryptocurrency analyst Mati Greenspan posted a Twitter poll asking his followers whether they agree that Bitcoin is and will be a safe haven from the coronavirus. 60.8% agreed that, yes, it is a safe haven.

Well, such optimistic views of Bitcoin have now been found out. According to CoinMarketCap, when the Dow Jones and FTSE 100 were falling by 7% or 8%, Bitcoin itself was falling by more than 10%. On Sunday, it was priced at around $8,760, while on Monday it fell to a low of $7,695, representing a drop of 12%.

Bitcoin's recent dive

Source: CoinMarketCap

In other words, when investors were taking their money out of the Dow Jones, FTSE 100 and other indexes, they weren’t putting it into Bitcoin. Instead, it would seem that they were putting it into gold, which rose to almost $1,700 on Monday.

A chart of gold last three months

Source: TradingView

At the same time, gold has increased in value by $78 since the beginning of March, representing a rise of 5% at a time when the coronavirus has stepped up a gear. By contrast, Bitcoin has fallen by 8% since the month began and the coronavirus situation worsened.

Bitcoin Is A Weak Safe Haven

Bitcoin has, at the time of writing, recovered slightly to $7,903, which is why its drop since the beginning of the month is only 8%, rather than a higher percentage. Still, this is in line with a slight rally to oil prices and to US stock market futures, which rose modestly after the US government promised financial support via a payroll tax cut.

All in all, Bitcoin has moved in step with world markets during the past few weeks, when the coronavirus situation in Europe and America has shown that it’s going to get worse before it gets better. And in fact, this shouldn’t be especially surprising, since a range of academic studies over the past few years have consistently shown that Bitcoin doesn’t generally behave like a safe haven asset.

One 2018 study, authored by L.A. Smales of the University of Western Australia, concluded that Bitcoin is “more volatile, less liquid, and costlier to transact” than other safe haven assets such as gold. Likewise, a 2019 study published in Economic Modelling found that gold “is an undisputable [sic] safe haven and hedge for several G7 stock indices, whereas Bitcoin takes these two functions in Canada. The out-of-sample hedging effectiveness of gold is much superior to that of Bitcoin.”

Bitcoin as Safe Haven-lite

While most evidence would indicate that gold is a superior safe haven to Bitcoin, other research suggests that the cryptocurrency does have some of the properties of a haven. Another 2019 study, published in the International Review of Financial Analysis, wrote that Bitcoin can be an intraday hedge for several currencies, including the British pound, euro, and Swiss franc. Another article published that same year in the same journal also discovered that Bitcoin “can be considered as a weak safe-haven asset in some cases.”

Taken together, such analyses reveal that it would be unwise to dismiss Bitcoin completely as a safe haven. Sure, it’s more volatile than gold and not quite as stable. Nonetheless, it’s hard to draw any conclusions from a single day’s or week’s decline, since even after ten years, Bitcoin is still a fairly new asset. Its market dynamics and logics aren’t entirely clear or mature. It may decline in the short term during the current coronavirus crisis, but could rise in the longer term, if world stock markets continue to be depressed.