Bitcoin no safe haven

The biggest cryptocurrency, Bitcoin, failed to provide investors with any diversification or risk mitigation benefit when equity markets sold off sharply in February and March. Rather, Bitcoin has been tracking the US S&P 500 Index closely for some time.

John Vaz, a senior lecturer in the Department of Banking and Finance at Monash University, charted the Bitcoin price over three years, comparing it with the local S&P/ASX All Ordinaries Index and the S&P 500.

He found that all three indices moved in synch during the recent sell-off.

“Cryptocurrencies are proposed as a finite resource with finite money supply, and due to this characteristic have been likened to gold,” says Vaz.

“Cryptocurrency advocates claim these qualities mean the cryptos would resist the sort of volatile sharemarket fluctuations we have been seeing in recent weeks, as they theoretically cannot be affected by government interventions, money supply decisions or inflation.

“But during the pandemic crisis this has not held true,” Vaz says.

Bitcoin has had a volatile trading history. Its all-time high was in December 2017, when its price got close to US$20,000. The bubble burst the following year when it hit a low of around US$3200.

After a long climb back, Bitcoin was trading around US$10,300 in mid-February. By mid-March its value had halved, falling to $5165 – a bigger fall than either of the equity markets Vaz has used as benchmarks.

Since then Bitcoin has staged a comeback and is back around $10,000.

Vaz’s view is that in financial market crises investors tend to react in similar ways, regardless of the markets they are invested in.

In the meantime, more traditional hedges, such as gold and the US dollar, have maintained reasonable value.

“During a crisis, everything will move down together for a while but an asset like gold won’t fluctuate as much because it is the popular perceived safe ground,” Vaz says.

Market analyst Simon Moore’s assessment of Bitcoin’s performance during this year’s global market turmoil is that its performance has been mixed.

“Bitcoin has held up better than many stocks but has fared less well than many other assets that can protect portfolios at times of market stress,” says Moore, the author of Digital Wealth, writing in Forbes magazine.

“For the year to date, Bitcoin is down less than the S&P 500 but gold is up and a diversified portfolio of bonds is up. If you view Bitcoin as a sophisticated digital form of gold, it hasn’t quite played out that way during this crisis so far.

“It’s hard to reach a conclusive verdict until the economic impact of COVID-19 has played out in full,” Moore concludes.

Vaz agrees, saying cryptocurrencies may play a role once the crisis has passed and its real economic impacts continue to be felt.

“This will depend in no small part on confidence in the financial system and the money underpinning it. Cryptocurrencies as an alternative form of money may increase in importance, depending on how governments handle the interplay of the macroeconomy and monetary policy, government debt and fiscal policy.”

He says that one possible outcome of the crisis is that consumers and investors may lose confidence in the Australian dollar and resort to currency substitution to preserve their buying power.

Cryptocurrencies could increase in popularity and value if confidence falls in fiat-based assets.

“Bitcoin definitely has a place post-crisis if governments make a mess of the fiscal and monetary policy,” says Vaz.

The head of the cryptocurrency data service Messari, Dan McArdle, told Wired magazine that there is a misunderstanding about Bitcoin’s value proposition.

McArdle says Bitcoin is a hedge against inflation and loss of confidence in fiat currencies, not a hedge against a typical market correction and recession.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.