As riskier assets hit all-time highs, it’s unclear what assets investors will use when the markets begin to retrace. Historically, investors have looked for safe-haven assets to store their value when markets become volatile and experience an adverse move. Some of the more popular “safe-haven” assets are U.S. Treasury bonds backed by the full faith and credit of the United States government. Other safe-haven assets include the Swiss Franc and Gold. When markets become volatile, investors usually look for safe-haven assets in which to invest their money to avoid experiencing large drawdowns in their portfolios. The question for investors is whether the online trading of Bitcoin will become a new safe-haven asset.
What is a Safe-haven Asset?
When riskier assets start to decline in value, investors tend to purchase safe-haven assets. A safe-haven asset is a type of investment that is expected to hold its value during times of market volatility. However, not all safe-haven assets will sustain their value during market turbulence. You must do your due diligence to determine if the safe-haven investment is a prudent addition to your portfolio. While systemic market volatility is unavoidable, safe-havens cause traders to look for an online trading investment that is generally uncorrelated to the broader markets.
What is an Uncorrelated Asset?
An uncorrelated asset is an investment that does not move in the same direction as other assets that you might hold in your portfolio. Correlation is a statistical measurement that describes how often two investments move in tandem with one another. A correlation coefficient is a number between one and negative one. A correlation of one means that two assets have returns that move in tandem with each other perfectly. A correlation of negative one means that the returns of two assets move in the oppositive direction of one another.
Lastly, a correlation of zero means that the two assets do not have any observable relationship. When an investor purchases a safe-haven asset, they want to make sure that they buy one that is negatively correlated or uncorrelated to the assets they have in their portfolio. The benefits of a safe-haven would be limited if the movements in the safe-haven assets moved in tandem with the assets held in your portfolio.
How Could Bitcoin Become a Safe-Haven Asset?
For Bitcoin to become a safe-haven asset, it needs to become uncorrelated with riskier investments. Historically, research shows that Bitcoin has been primarily held for speculative purposes. If most of the trading done involving Bitcoin uses the asset to generate opportunities for speculative reasons, then it is hard to see if it is becoming a haven. Additionally, most of the Bitcoin that is traded globally is transacted versus the U.S. Dollar. The dollar is considered a safe haven and it is thought of as the world’s reserve currency. Central banks throughout the globe hold large reserves of U.S. dollars since it is accepted globally and historically has held its value.
The historical volatility of the dollar is very low, and the ability to enter and exit a U.S. dollar transaction is transparent. For Bitcoin to be able to be a safe-haven asset, the liquidity of Bitcoin versus the dollar needs to improve. Currently, brokers can still charge 0.1 to more than 1% to transact. This elevated number compares to the standard for the EUR/USD, which is half a pip. Pip is a standard unit for measuring currency movements. The pip is usually the last decimal in the price quote. A half of a pip in currency trading is approximately 0.005%, which is a partial fraction of the cost to execute trading in the sovereign currency market compared to the cryptocurrency market. For Bitcoin to become a safe haven, the cost of trading will need to go down to provide better liquidity for large players in the marketplace.
What Does Bitcoin Have on Its Side?
The arguments for Bitcoin to become a safe-haven are vast. Gold, in many instances, is considered a safe-haven, but you cannot spend gold at vendors in general. While some vendors accept Bitcoin, such as those on PayPal and Square, few accept gold. Bitcoin is achieving mainstream acceptance and is also a regulated asset class in countries like the United States. In October of 2021, the U.S. SEC approved a Bitcoin Exchange Traded Fund (ETF), which now provides access to institutions and retail investors that want to trade Bitcoin.
The Bottom Line
Online trading of Bitcoin and the spending of Bitcoin have helped the cryptocurrency gain further acceptance. There is a long way to go before Bitcoin becomes a safe-haven asset, but it appears to be on its way. The cryptocurrency will need to see its liquidity rise, which will allow central banks to participate in trade and use it as a reserve. The additional millions of vendors accepting Bitcoin through PayPal and the increase in online trading via an ETF could help Bitcoin move in the direction of becoming a safe-haven.