Over the years bitcoin has frequently been touted as a “safe haven”. It’s an idea that seemingly doesn’t to want to die, despite the fact that its pretty much the most volatile things you can get your hands on and there’s been a stream of thefts and hacks worth hundreds of millions of dollars from exchanges and other crypto platforms.
What makes the persistence of the idea particularly odd is that bitcoin has not performed like a safe haven asset to date.
Take a look at this chart from an article on Coindesk last month, for example, which charts bitcoin’s correlation with gold — traditionally seen as a safe haven — over the past four years:
You will see that the 90-day correlation swings between a positive one and a negative one — meaning that sometimes bitcoin goes up when gold goes up and sometimes it goes down. You will also see that the trend line shows a slightly negative correlation, which has become slightly weaker over time (0 represents zero correlation). There is certainly no positive correlation to gold, at least not for any meaningful length of time.
You might argue that despite its reputation as the ultimate store of value, gold itself hasn’t always performed like a safe haven, and you’d be right. But neither has bitcoin ever shown any consistently negative relation to share prices, nor any sign that investors pile into it when stock markets are plunging or when they are concerned about risks to the global economy.
The funny thing is that almost as often as bitcoin is referred to as a “safe haven”, it is referred to as uncorrelated from other assets; indeed the two ideas do not seem to be seen as incompatible.
But then the following month, the Pomp tweeted that bitcoin in fact didn’t care about essentially anything (because “the math stays true”):
If bitcoin “doesn’t care about” trade wars or actual wars, why should it be seen as a safe haven? Aren’t those two ideas fundamentally incompatible? Safe havens surely do care about both trade and military wars — they are assets that investors tend to flock to during these anxious times, and they therefore tend to rise when there’s market uncertainty.
We got to thinking about all this during a conversation in New York last week with some crypto types, who insisted that bitcoin was in fact an “uncorrelated safe haven” — a term that to us, made little sense. We thought the idea of a safe haven was to be an asset investors flock to when stocks and other so-called “risk-assets” were plunging. Indeed Investopedia defines it thus:
A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns.
It turns out though, that the New York crypto bros aren’t the only ones pushing the “uncorrelated safe haven” idea. If you Google the phrase (with parentheses), you get 1,680 results. And the vast majority of those (on the first few pages of Google results, anyway), are referring to bitcoin. Like the lead from this CNBC piece from back in May:
Bitcoin is making its case (as) an uncorrelated, safe-haven asset while mainstream markets tumble.
The piece goes on to explain that bitcoin was up as much as 15 per cent on the day in question, while the Dow Jones was on course for its biggest one-day fall since January. So this was a day in which bitcoin was showing a negative correlation with stocks. If bitcoin continued to perform this way over a sustained period of time, one might say it was behaving like a safe haven.
There is obviously a crucial difference between two assets being uncorrelated (ie showing no relationship whatsoever) and two assets showing a negative correlation (ie one tends to go up while the other goes down and vice versa). Bitcoin is uncorrelated from other assets — whether those be safe havens or “risk assets” such as stocks.
So if it’s not a safe haven, could it be a hedge? That’s another term one hears frequently in the context of bitcoin — often in the context of being a hedge against the evil central bankers who are inflating away the value of all the world’s currencies.
But a hedge, according to Investopedia, is “an investment to reduce the risk of adverse price movements in an asset” which normally “consists of taking an offsetting position in a related security”. If you’re worried about stocks crashing, going long volatility via the VIX index, for example, might be a good way to hedge your stocks position, seeing as volatility tends to pick up when markets fall quickly.
But there is no guarantee that if markets were to all crash dramatically tomorrow, crypto markets wouldn’t crash just as dramatically (if not more so), so it can’t be thought of as a hedge, either.
We would argue that bitcoin is simply a diversifier. If a fund manager wants to put 1 per cent of his or her portfolio into crypto, that would certainly diversify it, though it would be a high-risk strategy. They could also choose to use 1 per cent of it for gambling, which can also sometimes bring in high returns, and which we would argue “investing” in crypto is more akin to.
Bitcoin is the 10-year Treasury of our time – FT Alphaville