Is Bitcoin the new global safe haven?
The trade war between China and the US, the Fed cutting interest rates again, rumours of the next global recession - as numerous distressing events unfold all over the world, the threat to global financial stability continues to rise.
In an attempt to hedge funds, investors are flocking to what they deem to be safer options such as government bonds, gold, and increasingly, cryptocurrencies such as Bitcoin. The rising price of cryptocurrencies as a result of such events calls into question whether or not Bitcoin and the like are becoming the new safe havens for calculated investors.
This article will look at the events that have lead to investors taking shelter under the Bitcoin bandwagon, along with other options and comparisons to other safe haven assets.
US/China trade war
The escalating trade tensions between the US and China have struck fear into the global markets, threatening the occurrence of an economic recession bigger than the 2008 crisis. China has suspended purchasing agricultural products from the US, as a response to the American government imposing 10% tariffs to $300 billion worth of goods from the Chinese.
In light of these events, reports have surfaced about investors leaving the yuan for Bitcoin, as a hedge against the potential destabilisation of the global currency markets.
China devaluing its currency
Prompted by the tariffs and the escalation of the trade war, China has deliberately devalued the Yuan to make Chinese exports more competitive in the international market – a surprising but common move in global currency wars. At 7 yuan to 1 US dollar, the BBC reports that this is the lowest level the Yuan has hit since 2008. So, it’s no wonder investors are moving towards Bitcoin for which the price so far has been reasonably immune to the effects of political situations.
Reduction of basis points for interest rates around the globe
Further inflaming the market, and in a suspected move against the Chinese, the American Federal Reserve (the US Central Bank) cut interest rates by 25 basis points. According to President Donald Trump, the move was done to weaken the dollar and establish more interest around American exports.
While this is going on, the two warring giants aren’t the only countries causing fluctuations in the international markets. The Bank of Thailand announced in early August that they will reduce their rates by 25 basis points, while the Bank of New Zealand reduced its rates by 50 basis points around the same time.
Bitcoin will give asymmetric returns
As global crises unravel, more and more investors are turning to Bitcoin, further establishing itself as a safe haven asset. But why cryptocurrencies – especially since they’re known to be so volatile?
It all stems from the fact that Bitcoin is decentralised. Bitcoin has been mostly immune to geopolitical tensions, and has thus far managed to outmaneuver government interference.
Moreover, co-founder of Morgan Digital Creek Anthony Pompliano adds that Bitcoin is attractive due to its ability to provide asymmetric returns, citing that it has “proven to be non-correlated (with the ongoing trade war) and to provide an asymmetric return compared against traditional assets.”
Will Bitcoin replace gold?
Among all the safe haven assets, gold is arguably one of the safest, which is mainly due to how it has maintained its historical value over time. But with cryptocurrencies being introduced, the precious metal may just get kicked out of the running. In fact, fresh data from Bloomberg reveals that gold has shown strong correlations to Bitcoin since June, showing .0837 correlation. A correlation coefficient of 1 indicates that the two assets move together in tandem, while a -1 indicates movement in opposite directions. In other words, when gold moves up, so does Bitcoin.
While some financial investors are celebrating Bitcoin and the like, not everyone in the finance sector agrees that cryptocurrencies are the solution. In an opposing view, financial experts FXCM argue that the supply and regulations surrounding gold makes it a safer haven, given that it has a more certain supply and clearer regulations compared to cryptocurrency. They say gold is simply much more reliable and less volatile than Bitcoin.
However, perhaps instead of asking whether or not Bitcoin can replace gold, we should try to accept that the two assets can exist in a complementary fashion. With gold being a long-term safe asset, and cryptocurrency as a hedge for geopolitical tensions and other short-term situations, investing in both could be the safest choice.
Another cryptocurrency option to consider: stablecoins
While Bitcoin certainly serve as a way to make transactions easier, its volatility and high transaction fees aren’t always appealing to some investors. Fortunately, there exists a cryptocurrency that is less volatile in nature – stablecoins. These are tied to local currencies such as the Japanese yen, US dollar, and even the Chinese yuan, which solidifies their stability.
However, whereas Bitcoin and other cryptos are seen as viable investments, our article on the ‘A To Z Of Stablecoins’’ emphasises that stablecoins are not an investment. Rather, they serve the conventional purpose of being a medium of exchange.
Furthermore, the conversion rates are never in question, as stablecoins are backed by real currencies. And as they are essentially one-to-one with real money, liquidity is not a problem. Furthermore, stablecoins promote financial inclusion, since economies that are based in cash can still use stablecoins and access the wider world of cryptocurrencies.
Hedge against chaos
With the world economy in turmoil, finding safe-haven assets is vital to ensure an investor’s protection. Although cryptocurrencies are rising and claiming a place right next to gold and bonds, not all financial experts believe in hiding behind the volatile tendencies of the asset. Nonetheless, with stablecoins in the mix, cryptocurrencies can serve as a hedge against the chaos of the global political landscape.