Bitcoin Fails the Safe Haven Test Again. Time to Change the Narrative?

Time and again, bitcoin’s status as a safe haven is tested. Time and again, bitcoin fails the test.

The recent coronavirus scare, which resulted in the sharpest selloff in the stock market since 2008, was an opportunity for the cryptocurrency to attract fearful investors, fleeing from a market crash, into its ecosystem. Except for a brief spike in prices, however, the trajectory of bitcoin’s prices has mostly continued its unpredictable course. In fact, the cryptocurrency’s prices have mostly mirrored that of the broader market, declining with selloffs and surging along with it.

And, this is not the first time. Research firm DAR claims in a recent report that bitcoin has underperformed its daily returns during drawdowns in the stock market since 2011. “Anecdotally, beginning in 2019, we noticed intraday price movements associated with global macro events that suggest BTC is increasingly viewed as a risk-off asset,” the report states, meaning investors have stopped looking to the cryptocurrency as a safe haven since last year.

Perhaps it might be time to change the narrative.

Does the Safe Haven Status Matter?

In an ever-expanding universe of investable assets, bitcoin’s returns should be sufficient reason to invest in it. After all, the bottom line for investors and traders is profits. Those profits, however, come at a steep regulatory cost for crypto investors. Most jurisdictions in the world do not recognize bitcoin in any form.

Regulatory status apart, the promise of bitcoin as a safe haven asset is ingrained in its founding myth. The cryptocurrency was developed, so the story goes, as an alternative to a corrupt and centralized finance ecosystem controlled by central bank levers. Investors, traders, and consumers should be attracted to the relative safety provided by a decentralized financial rail, which is not at the whim of central banking interest rates. Except those decentralized rails are also an unregulated highway, whose networks are reportedly flooded with transactions by criminals.

The centralized plumbing and regulation abhorred by Bitcoin purists has made the modern finance ecosystem sustainable and trustworthy. Even gold, long considered an alternative to stocks, works within this infrastructure. The Federal Reserve reportedly holds about three-fourths of its currency reserves in gold. Of course, the precious metal has legacy and history. In contrast, bitcoin’s novelty is a drawback. Carving out space as a safe haven asset may require more time and familiarity.

In the interim, bitcoin is being touted as a “holy grail” for multi-asset portfolios because it has little to no correlation with mainstream assets. The problem is that, much like the elusive cup, the drivers of bitcoin’s price action remain mysterious.  Whether it is price gyrations during times of crisis are simply the result of traders shifting funds between exchanges or new participants coming its network is still a matter of open debate.