Very little about cryptocurrency stokes more disagreement than suggesting it is a safe haven in the same league as gold and silver. Even suggesting that investors put money into cryptocurrency as a hedge against losses elsewhere sets the minds of many traditional analysts into a frenzy. "How could a non-tangible, digital asset be as valuable as gold?" they wonder aloud.
Despite ongoing speculation as to the value of crypto as an investment asset, there are signs suggesting that people are starting to come around. Those signs suggest that crypto is becoming a safe haven in general, and that Bitcoin is the asset of choice for those looking to hedge their investments by putting money into crypto.
A security in many countries
At the heart of any such discussions is the knowledge that cryptocurrencies are treated like traditional securities in many countries. The U.S. and UK are two good examples. Both treat Bitcoin and other cryptocurrencies as securities for tax purposes. That means any money you make on your crypto investments is subject to capital gains tax.
It is also worth noting that cryptocurrencies are not considered legal tender either. So while Bitcoin might act as a payment system of sorts, it is not a legal instrument for settling debts. This gives further credence to the idea of treating cryptocurrencies as securities. They are simply digital assets with value defined by utility and market forces.
If we accept the premise of cryptocurrency being a security, we then have to look at the prospect of investing in it. After all, isn't that why securities exist? Cryptocurrency should be no different just because it is a digital asset. It still represents some sort of value investors are interested in.
1. Recent market fluctuations
The point of this post is to discuss cryptocurrency becoming a safe haven for investors. Let's get to it, beginning with a discussion about recent market fluctuations. Cryptocurrency prices have certainly been up and down over the last couple of months.
Bitcoin was trading at about $3,500 at the start of 2019. It eclipsed the $12,000 mark very briefly in early July. Since then it has fallen to just above $9,000 and then risen again to again approach $12,000. Normally we look at such price fluctuations in terms of Bitcoin's volatility. Yet there is another perspective here.
Cryptocurrencies absolutely are volatile. But it helps to look at what triggers drastic price changes. A trend some are beginning to notice is that Bitcoin seems to trade inverse to traditional stock markets. In other words, when stock markets are on a downward trend crypto tends to be on the upswing. When stocks are climbing, interest in cryptocurrency seems to level off.
This inverse relationship is observed with commodities as well. Gold is a prime example. Investors wary of falling stock prices tend to protect themselves by moving more assets into gold. That is the whole point of using gold as a hedge against poor performance in the stock market.
Casual observation suggests investors are starting to do the same thing with cryptocurrencies, particularly Bitcoin. They get nervous about stock prices, so they liquidate some of their holdings and move the money to Bitcoin. If that is indeed what is happening, then it proves investors are looking to cryptocurrency as a hedge similar to gold.
2. The ongoing trade war
Hedging one's investments is always a concern during times of economic uncertainty. Moreover, nothing makes for more uncertainty than an uneasy political environment. Enter the ongoing trade war between China and the U.S. The war seems to be reaching new heights with every passing quarter.
Trade wars generally have good consequences in the long term. In the short term however, a lot of damage can be done. That is the case with the current China-U.S. trade war. It is creating a certain amount of anxiety in global financial markets as well as hurting entire industries whose trade has now been interrupted.
An asset recognized as an investment hedge is not terribly impacted by uncertain economic times. A commodity like gold still does very well during economic uncertainty because it has an inherent value regardless of global economics. Simply put, gold is expected to have a value that will not collapse regardless of how the China-U.S. spat turns out.
On the other hand, stock markets are especially volatile during economic uncertainty. So are government-backed bonds, commercial bonds, and even fiat currencies. They all respond negatively to economic turmoil because they all rely on governments to play nicely with one another.
Cryptocurrency's decentralized nature suggests it is less impacted by government-induced economic turmoil, if it is impacted at all. You can see the evidence just by tracking Bitcoin in relation to the ongoing trade war. Whenever there is a new development serious enough to cause stock markets to crash, Bitcoin remains relatively stable. This is yet another sign that Bitcoin is an effective safe haven.
3. Increased whale activity
Bitcoin whales are major investors who hold tremendous amounts of coin. Those who pay attention to Bitcoin as an investment rather than a monetary system also pay attention to what the whales are doing. When Bitcoin whales start moving coin, it is indication that something is going on.
Your typical whale seeks to strengthen his portfolio by taking advantage of downturns. When the price sinks to what is expected to be a given low point, the whale stands ready to buy up all of those coins being sold by nervous investors. At the next peak, the whale moves some of his holdings into something more stable in order to preserve profits.
Recently there has been an increase in whale activity. This, despite the fact that Bitcoin's price has been steadily increasing since meeting resistance at $9,500. Whale purchases during market upswings suggests large-scale investors are looking to transfer some of their wealth out of more traditional securities and into Bitcoin instead.
4. Libra's lack of impact
The lack of any noticeable impact from Facebook's Libra announcement is the next sign that cryptocurrency might be turning into a hedge for some investors. Bear in mind that the mainstream media and regulatory community were all but breathless in the days following the release of Facebook's two white papers.
One would expect that genuine concern among cryptocurrency investors would send prices tumbling. After all, if regulators are to be believed Libra has the potential to wreak havoc on the world's financial systems. It also has the potential to give Bitcoin a real run for its money.
Today, many casual observers are surprised that cryptocurrency prices have not suffered in the wake of the Libra announcement. The fact that investors are not pulling their money out of Bitcoin in preparation for Libra says a lot. Moreover, continuing to pump money into Bitcoin with Libra in the shadows indicates that investors still trust Bitcoin implicitly.
That kind of trust works well to establish a security as a safe haven. Nervous investors turn to their favorite hedges when they are afraid of heavy losses on other fronts. They put their money into the assets they trust the most. Bitcoin has apparently become such an asset for a growing number of investors.
5. Changing sentiment among advisors
One last thing to consider is a gradually changing sentiment among financial advisors. Many of the same advisors who declared cryptocurrency anathema just a few years ago are now encouraging their clients to put at least some of their wealth into digital assets. Others have gone so far as to say that limiting exposure to cryptocurrencies limits a portfolio's earning potential.
At the end of the day, advisors are not magicians capable of miraculously making a portfolio grow. They also tend to be poor prognosticators as well. Yet investors seem to trust them implicitly. If an advisor says such and such an investment is something clients should jump on, at least some of those clients will do just that.
This suggests that changing advisor sentiment is having an impact on investors who otherwise would not even consider cryptocurrency. The fact that their advisors are now saying positive things about Bitcoin gives investors reason to consider getting in on the game.
How does this relate to cryptocurrency becoming a hedge? It relates in the sense that investors are prone to using it as a hedge vehicle just to "test drive" it. They will not invest substantial amounts until they are confident the asset will perform well.
It appears as though there may be a small but growing number of first-time crypto investors doing just that. They are putting small amounts of money into Bitcoin, Litecoin, etc. just to see how it goes. If it all works out well, they may be looking at future digital assets as a hedge against losses elsewhere.
Now is an interesting time to be invested in cryptocurrency. If you are into that sort of thing, it is hard to deny that current market conditions are a far cry from those that led to Bitcoin peaking at just over $20,000 back in 2017. This is a whole new market is governed by an entirely different mindset. It is a market that seems to be ready to recognize cryptocurrency as a viable safe haven.