Is Bitcoin A Safe Haven For Fearful Investors?

One of the favorite theories put forward by Bitcoin proponents is that its decentralized and global nature makes it an ideal safe haven. To prove their point, they point to instances in the past when the cryptocurrency’s price rose in response to global turmoil. But the relationship or correlation is far from clear.

Recent events, however, have provided them with further ammunition to make their case and reignited conversation that the cryptocurrency may be a safe haven of sorts.

Major indices in the United States crashed today after China devalued its currency in response to President Trump’s latest round of tariffs. The Dow crashed by approximately 3% on a day that some said was its worst in 2019. The S&P 500 and Nasdaq 100 also fell by 3% and 3.5% respectively. In contrast, Bitcoin, which had been sliding horizontally for the last week, gained strength and surged by 9%.

The narrative here is that fearful Chinese investors are circumventing capital controls and putting their money into Bitcoin until the trade war rhetoric subsides.

An Oncoming Bitcoin Rally?

Appearing on CNBC, Jeremy Allaire, CEO of Circle – a crypto-based platform, said the trends of rising nationalism and currency conflicts are supportive of a non-sovereign, highly secure digital store of value.

He said that the Chinese government had softened its stance towards cryptocurrencies, listing several examples such as the Bank of China’s information campaign and Huobi’s addition of a member of the Communist party to its ranks.  

Billionaire investor Michael Novogratz, who had invested a third of his fortune into cryptocurrencies, said that the Bitcoin rally could have “real legs” this time around due to global instability.

Simon Peters, analyst at eToro, stated that there was a “strong possibility” that some Chinese investors are backing Bitcoin’s chances against the Yuan.

Are Investors Really Biting the Bitcoin Bait?

As in the past, the evidence remains unclear.

Bitcoin is ostensibly a borderless and unregulated cryptocurrency, making it an ideal safe haven. While its price has spiked (or declined) in response to developments in the global finance industry, the relationship (or lack of it) has been difficult to prove.

The pseudonymous nature of Bitcoin’s blockchain makes it difficult to identify investor location and details. In his appearance on CNBC today, Allaire was unable to answer a question about how Chinese investors were contributing to a Bitcoin rally even though it was banned in the country. Anecdotal evidence has replaced fact-based analysis in the Bitcoin story.

The computerized nature of trades as well as thin volumes at cryptocurrency exchanges means that trading in Bitcoin can easily be manipulated. The cryptocurrency’s price movements have also not always kept pace with economic turmoil or financial crises. For example, it slumped for most of last year even as President Trump raised the stakes in his war against China and Venezuela suffered an unparalleled economic crisis.

Part of the reason for this disconnect may lie in Bitcoin’s trading volumes, which set the cryptocurrency’s price. A report earlier this year by Bitwise indicated that more than 90 percent of reported trading volume at cryptocurrency exchanges was fake. Alameda Research, a Berkeley-based trading firm, evaluated data across a broad smattering of sixty exchanges, including Coinbase and Binance, and set up a website to analyze fake trading volume. As of this writing, 70.8% of all trading volume reported at these exchanges is fake.

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