- Bitcoin appearing strong before the weekend with a low of only USD 6,537
- A CoinDesk columnist believes that Bitcoin hasn’t worked out as a safe haven just yet, because it was built for a scenario far worse than now
Bitcoin has been unable to test USD 7,000 the entirety of today but instead spent most of the day in Asian and Europe trading in a relative high level around USD 6,700, with only a daily low of USD 6,537 (CoinDesk) to show for all the bears’ work in late Thursday trading.
With all the gloom and doom of financial markets worldwide, the talk has turned from an overbearing of Bitcoin as an alternative currency or asset for safe havens, as it has been suffering much of the same ordeals as traditional markets. But the Bitcoin believers have not waned in their belief of Bitcoin as a hedging asset, and are changing their tune slightly to say that no, the digital asset is still a safe haven asset in crisis, but for one much worse than what we’re experiencing now.
Writing in his investor newsletter, CoinDesk columnist Byrne Hobart says that Bitcoin was definitely designed to be a harbor for financial distress, and reminds everyone that this was its mission stated even from its origin block, which contained the cryptic message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
There's a taxonomy of safe-haven assets, from lighter bets on the status quo to front-running deleveraging to the stuff you'd want to own if you had to flee the country. Now we know Bitcoin is not two of the three. https://t.co/Hlhqo18ACy
— Byrne Hobart (@ByrneHobart) March 26, 2020
Until this day, more than 10 years later, Bitcoin believers believe it is the asset to hold when all others are haywire. Hobart does admit that recent performances have brought dismay to Bitcoin maximalists, but writes:
“So it’s disappointing, to say the least, that after the fastest market rout in recent history, an asset built to be a safe haven … dropped 31 percent while the S&P dropped by a quarter. The daily correlation between the S&P and bitcoin went from slightly negative in February to 0.6 in March. Bitcoin barely responded to the Federal Reserve cutting rates to zero, and shrugged off other monetary interventions.”
But he then goes on to explain that safe haven assets are really categorized to fit into three different scenarios: a safer version of risky bets, assets that people borrow in good economic conditions and assets built specifically for Armageddon scenarios.
The first option, he says, works in a hedge when a slight slowdown is in effect. He gives examples of companies with high margins, or corporate bonds instead of equities, or investment in a company producing consumer staples. High-end consumer items or luxury products do particularly badly in a slowdown, but daily necessities won’t suffer a lack of demand — tinned food and toilet paper are some essentials!
In the second option, he says that the classic safe asset are usually safe because investors tend to borrow them to make other riskier investments. So a 10-year corporate bond, for example, means you’re betting that the company has a good credit and will get good interest rates. The Japanese yen as well has been a safe bet in this way because the Bank of Japan has always set low interest rates (even to the point of negative interest rates these days). So people borrow yen to invest in currencies with higher interest rates, and when bad news happens, and trades settle, people end up buying that safer asset.
Now the third scenario, the end of the world. This, Hobart says, is what Bitcoin is made for. And contrary to the unlikeliness of and end-of-world scenario might be for many of us, one only has to look back in the past century to find multiple instances where countries enjoying a good economy and good political stability can suddenly find itself in disaster.
Hobart gives the example of French financier Felix Rohatyn whose family fled France as Nazi Germany invaded in the 1930s. Gold, smuggled out in toothpaste tubes, turned out to be their savior when they lost everything else. Imagine, in more recent times just in the past decade alone, where entire countries descended into total chaos and war, like in South Sudan or Syria, or even in Venezuela where civil unrest has turned its national bolivar into all but worthless paper money. But if you could easily flee that situation with, say a USB in your pocket, or a memorized seed phrase to restore your Bitcoin wallet when you are safely out of danger? You would protect your value and your money easily.
And the author continues to say that the situation now may likely get worse and deepen, but, like the 1950s flu pandemic, the recovery to the economy could be just as swift as it crashed. He says that for now, investors won’t be looking to invest more into Bitcoin but will be liquidating assets for hard cash to pay for bills and necessities. He ends his discussion by saying:
“They do, however, need to scramble for dollars to service debts, so they’ll sell anything – stocks, bonds, real estate, crypto – and convert it into an asset they can use to pay the bills. Bitcoin’s drop doesn’t disprove the safe haven argument. It just shows us bitcoin is designed to be a safe haven from a worse storm.”
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