Bitcoin is a Safe Haven Asset by Being Uncorrelated & Censorship Resistant: Arcane
- As Bitcoin price drops, so does the Fear and Greed Index. Trading Volume on CME drops to a new 2020 low
- Bitcoin is a great tool for asset diversification in an investment portfolio, with no uncertainty on its other underlying assets
Bitcoin's (BTC) price wiped out gains made in February. The digital asset started the month at around $9,400, and ended at just above $8,600, losing 8.5% of its value in the process.
This has the Fear and Greed Index falling to 39, a level not seen for nearly two months. Additionally, the volume on the regulated platform CME dropped to a new 2020 low, just after hitting the highest trading volume.
Similarly, the total volume of the world's top ten exchanges, the amount of bitcoin exchanging hands went from over a billion in 2020 so far, down to just 275 million yesterday.
The crash came during the Coronavirus (Covid-19) scare that has the stock market experiencing its biggest weekly drop since 2008 while gold surges to 7-year highs.
“is not a safe haven because it goes up when there is global instability.”
This has been because two of Bitcoin's unique properties; first being that it's uncorrelated with all other asset classes while also being censorship-resistant as a second.
Bitcoin: Great for Diversifying Your Portfolio?
Talking about Bitcoin's uncorrelation, the authors Torbjørn Bull Jenssen & Bendik Norheim Schei argued that the negative correlation isn’t of any value in itself because it doesn’t create any additional value:
“With the financial tools and products available in the market, negative correlation can easily be created by short-selling assets. One can even decide the level of negative correlation with leveraged positions.”
A correlated asset is also unique, which also makes bitcoin an “interesting” and suitable safe-haven asset.
“A safe haven that is neutral to every asset class, has its own distinct value drivers and reacts to news and changes around the world differently than other assets. Bitcoin doesn’t follow gold, stocks, bonds or any other asset. This leads to an asset that is great as a tool for the diversification of an investment portfolio,” states Arcane Research.
Being correlated means the asset can fluctuate randomly over time, much like we saw this year. Earlier in 2020, Bitcoin went up while stocks remained relatively flat. This week, by contrast, Bitcoin fell with the stock market.
Because most assets are correlated, “this might drive demand for uncorrelated assets in turbulent times.” Additionally, this could potentially lead to a negative correlation between safe havens and the rest of the financial markets.
There's No Uncertainty on What the Asset’s Underlying is
For an asset to be a truly global safe-haven asset: liquidity, censorship resistance, and low credit risk are “paramount” attributes.
“Bitcoin allows one to buy an asset that always represents the same value as the market price, with no uncertainty on what the asset’s underlying is.”
And while this sounds similar to physical gold, Bitcoin outperforms gold’s properties — It's easy to store and transfer around internationally, no reliance on third parties, and protection from confiscation and censorship.
The main issue with Bitcoin is limited liquidity which has rapidly become a non-issue as it trades all over the world, 24 hours a day and 365 days a year.