Can Cryptocurrency Be a Safe-Haven Asset?
The ongoing coronavirus crisis has caused great turmoil and shaken the global financial system
The ongoing coronavirus crisis has caused great turmoil and shaken the global financial system.
People face unprecedented global economic and health risks in the markets, and therefore have increasing needs to find good safe-havens for their investments.
The current crisis has caused multiple problems and is significantly different from other financial crises known to people across the world.
Global investors are wondering where are safe-havens to store their assets. They are looking to diversify their portfolios with alternatives for risk mitigation amid the COVID-19 chaos.
Many people now want to diversify a little bit by allocating cryptocurrency, particularly Bitcoin. But others claim that Bitcoin cannot be regarded as a safe-haven asset. Now, which is the way forward?
What Are Safe-Haven Assets?
Investments or assets are considered safe-havens when expected to increase in value or retain their value during times of economic turbulence.
They are desired by investors who wish to avoid losses and limit their risks when markets dive. However, safe-haven investments are not all equal.
Some safe-haven investments are known to perform well during economic difficulties while others increase or maintain their price. Therefore, all investors need to carry out due diligence research before purchasing such assets to evaluate the risks involved.
A role of a safe-haven investment is to diversify an investment portfolio and offer protection during times of increased market volatility.
The best safe-haven investments are either negatively correlated or uncorrelated to the general market during the economic downturns.
In other words, the best safe-haven assets rise in value when the rest of the market goes down. This demonstrates a rise in investor interest in the asset during depressions and recessions.
The most popular traditional safe-haven investments include commodities, stocks and bonds, US treasury bills, oil, foreign exchange currencies,
and some precious metals like gold. Bitcoin is a relatively new form of currency that has no physical value, and therefore, is quite different from the above traditional assets.
Cryptocurrency A New Safe-Haven Asset
Many financial experts believe that Bitcoin investing is a vital asset for an investment portfolio as it can provide security during economic recessions. In other words, investing in Bitcoin cryptocurrency could be a good investment during difficult economic times.
Bitcoin is becoming a safe-haven, just like gold. The price of Bitcoin has been rapidly increasing in recent months amid the COVID-19 pandemic.
Interest in Bitcoin has risen even more with the recent coronavirus crisis that has crippled stock markets and resulted in lockdowns that have caused massive unemployment.
Bitcoin price crashed in March 2020 but bounced back to levels before the crash. Currently, the price has significantly climbed and is approaching $12,000 per coin.
Bitcoin could be referred to as digital gold since it shares several characteristics that make gold a great store of value. Both gold and Bitcoin are in a relatively inert state and have an extremely limited supply.
Despite its sometimes-extreme volatility, Bitcoin has been the best-performing asset of the past ten years. For early investors, this means an ROI of 100,000% in ten years.
Compared to other safe-haven investments during the coronavirus pandemic, market data indicates that Bitcoin has been moving differently from other investments and even outperformed them.
The leading cryptocurrency has outperformed other asset classes like oil, stocks, US Treasury bonds, real estate, silver, and gold in the current economic recession.
It is clear that with some level of confidence that Bitcoin behaves as a safe-haven asset, it is a better investment for hedging against portfolio losses during an economic downturn.
The value of Bitcoin has immensely increased, and interest has significantly grown among users during the current pandemic, with demand rising in several countries.
Bitcoin peer-to-peer trading volume peaked to record levels in Venezuela, Morocco, Argentina, and Chile, with additional reports indicating that some crypto exchanges experienced traffic peaks in the recent few weeks.
Reports show that more people are trading cryptocurrencies in general, not just Bitcoin.
The coronavirus has created mass financial panic in the entire world, prompting several investors and analysts to consider if cryptocurrency could be a safe-haven investment during a time of economic crises.
Safe-haven assets either keep or rise in value during an economic panic.
Bitcoin demonstrates this behavior despite its price volatility.
Several financial experts recommend investors to consider diversifying into Bitcoin.
According to the JP Morgan report, the crypto market continues to mature, and increasing numbers of institutional investors are participating in cryptocurrency trading.
Since Bitcoin is unlinked to any macroeconomic factor or national currency, it could be a good choice for portfolio diversification.