Safe haven asset or risky asset? BTC under the shadow of the trade war

Author of the article: Andrew Singer

Article compilation: Block unicorn

A few years ago, many in the crypto community described Bitcoin as a “safe haven” asset. Today, fewer people refer to it as such.

Safe-haven assets preserve or increase in value during times of economic stress. It can be government bonds, currencies like the US dollar, commodities like gold, or even blue-chip stocks.

The global tariff war triggered by the United States and unsettling economic reports have led to a stock market crash, and the same goes for Bitcoin - something that should not happen for a ‘safe haven’ asset.

Compared to gold, Bitcoin has also performed poorly. “Since January 1st, the price of gold has risen by +10%, while Bitcoin has fallen by -10%,” Kobeissi Letter pointed out on March 3rd. “Cryptocurrencies are no longer seen as a safe haven.” (Bitcoin saw a bigger drop last week.)

But some market observers say this is not entirely unexpected.

Bitcoin (white) and gold (yellow) price charts, from December 1st to March 13th. Source: Bitcoin Counter Flow

Did Bitcoin used to be a safe haven asset?

“I have never viewed Bitcoin as a ‘safe-haven asset,’” Paul Schatz, founder and president of the financial advisory firm Heritage Capital, told us. “Bitcoin’s volatility is too high to be classified as a safe-haven asset, although I do believe investors can and should have an overall allocation to this asset class.”

“For me, Bitcoin is still a speculative tool, not a safe-haven asset,” Jochen Stanz, Chief Market Analyst of CMC Markets (Germany), told us. “Safe-haven investments like gold have intrinsic value and will never be zero. Bitcoin could drop 80% in a major adjustment. I don’t think gold would do that.”

Cryptocurrencies, including Bitcoin, ‘have never been a ‘safe haven tool’ in my opinion,’ assistant professor of finance at the University of Central Florida, Buvaneshwaran Venugopal, told us.

But things are not always as clear as they initially seem, especially when it comes to cryptocurrencies.

People may think that there are different types of safe-haven assets: one for geopolitical events such as war, epidemics, and economic downturns, and another for severe financial events such as bank failures or a weakening US dollar.

Views on Bitcoin may be changing. In 2024, exchange-traded funds (ETFs) issued by major asset management companies such as BlackRock and Fidelity will include it, expanding its ownership base, but also potentially altering its ‘narrative’.

Now, it is more widely seen as a speculative or “risk preference” asset, similar to technology stocks.

“Bitcoin and the entire cryptocurrency space are highly correlated with risk assets and typically move inversely to safe-haven assets such as gold,” Adam Kobeissi, editor of the Kobeissi Letter, told us.

He went on to say that with ‘more institutional participation and leverage,’ there is a great deal of uncertainty about the future of Bitcoin, and ‘the narrative has shifted from Bitcoin being seen as ‘digital gold’ to a more speculative asset.’

People may think that the acceptance of traditional financial giants such as BlackRock and Fidelity will make the future of Bitcoin more secure, which will enhance its narrative of hedging - but according to Venugopal, this is not the case:

**The influx of large companies into Bitcoin does not mean it becomes more secure. In fact, it means Bitcoin is becoming more and more like any other asset that institutional investors tend to invest in."

Venugopal continued, saying that it will be more influenced by conventional trading and drawdown strategies used by institutional investors. “If there’s anything different, Bitcoin is now more correlated with risk assets in the market.”

The dual nature of Bitcoin

Few people deny that Bitcoin and other cryptocurrencies are still subject to significant price volatility, recently driven by increased retail adoption of cryptocurrencies, especially fueled by the meme coin craze. “This is one of the largest cryptocurrency onboarding events in history,” Kobeissi pointed out. But perhaps this is the wrong focus.

“Safe haven assets are always long-term assets, which means that short-term volatility is not a defining factor,” Crypto is Macro Now newsletter author Noelle Acheson told us.

The biggest question is whether Bitcoin can maintain its value against fiat currencies in the long run, and it has already been able to do so. “The numbers prove its effectiveness - over almost any four-year period, Bitcoin has outperformed gold and US stocks,” Acheson said, adding:

Bitcoin has always had two key narratives: it is a short-term risk asset sensitive to liquidity expectations and overall sentiment. It is also a long-term store of value. It can be both, as we have seen.

Another possibility is that Bitcoin may be a safe haven asset for certain events, but not for others.

Gold can be used as a hedge against geopolitical issues such as trade wars, while both Bitcoin and gold can be used as a hedge against inflation. “As a result, both are useful hedging tools in portfolios,” Kendrick adds.

Other people, including Cathie Wood of Ark Investment, also agree that Bitcoin acted as a safe-haven asset during the run on SVB and Signature banks in March 2023. According to CoinGecko data, when SVB collapsed on March 10, 2023, the price of Bitcoin was around $20,200. A week later, it was close to $27,400, an increase of about 35%.

The price of Bitcoin fell on March 10th and rebounded a week later. Source: CoinGecko

Schatz does not believe that Bitcoin is a tool for hedging inflation. The events of 2022, when FTX and other crypto companies collapsed and the crypto winter began, “greatly damaged this argument.”

Perhaps it is a tool for hedging the US dollar and government bonds? “This is possible, but these scenarios are quite dark and hard to imagine,” Schatz added.

Do not overreact

Kobeissi agrees that short-term volatility in asset classes “tends to be least correlated over longer time frames.” Despite the current pullback, many fundamentals of Bitcoin remain positive: support from the U.S. government for crypto, announcements of U.S. Bitcoin reserves, and the surge in cryptocurrency adoption.

The biggest question facing market participants is, “What is the next key catalyst for an uptrend?” Kobeissi tells us. “That’s the reason for market pullbacks and consolidations: looking for the next key catalyst.”

“Since macro investors began to see Bitcoin as a high-volatility, liquidity-sensitive risk asset, it has behaved like a risk asset,” Acheson added. Furthermore, “almost always it’s the short-term traders who set the final price, and if they are exiting risk assets, we will see weakness in Bitcoin.”

The market is overall struggling. “The re-emergence of the inflation ghost and the serious impact of economic slowdown on expectations” also affect the price of Bitcoin. Acheson further pointed out:

Given this outlook, as well as Bitcoin’s dual nature as a risk asset and a long-term hedge asset, I am surprised it has not fallen further.

Venugopal said that since 2017, Bitcoin has not been a short-term hedge or safe haven asset. As for the long-term argument that Bitcoin has become digital gold due to its 21 million supply cap, this only holds true “if most investors collectively expect Bitcoin to appreciate over time,” and “this may or may not be the case.”