Bitcoin Is a Safe Haven For Turmoils Stronger Than Current One

Bitcoin (BTC) was created for various purposes, but one of the most important was to act as a safe-haven asset during financial crises. From the Genesis Block’s coinbase parameter (“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”) to today, Bitcoin’s enthusiasts have believed in it as something worth holding even when market loses control.

So it is disappointing, to say the least, that after the fastest market rally in history, an asset designed to be a safe haven… lost 31% while S&P plunged by a quarter. The daily correlation between the S&P and Bitcoin went from slightly negative in February to 0.6 in March. Bitcoin barely reacted to the Federal Reserve cutting rates to zero, and shrugged off other monetary interventions.

This is painful to any Bitcoin owner, especially to those who keep is as a hedge against precisely this type of sell-off, and precisely this kind of central bank response. The money printer went brrr, thus the store-of-value lost value.

What’s going on?

When we speak about safe-haven assets, we actually mean three different kinds of assets, for three types of scenarios:

Safer versions of risky bets, kind of those you’d invest in to hedge against a mild recession. These may include less-levered companies in a given industry, high-margin companies, corporate bonds rather than equities or any investment in a consumer staples company. When the economy sinks, it is bad news for companies in the champagne and luxury hotel business, but sales of toothpaste and canned food remain largely intact.

Assets people turn to during good times: Yen and the U.S. Treasurys are classic safe haven assets, partially because investors use them to make other bets. If you purchase a 10-year corporate bond, you are making a bet on the company’s trustworthiness, and a bet on interest rates. Most of those who are good at credit analysis are not experts in foreseeing the future of monetary policy, so many of them buy the corporate bonds and bet against Treasurys of the same maturity to control their interest rate risk.

The yen is a similar situation: Since yen rates have been so low for so long, a classic forex trade is to borrow yen and invest in a currency with higher rates. In both cases, when the trade unwinds — when you sell yosr corporate bond or close out your bet on the Turkish lira or the South African rand, you ultimately purchase the safe asset. Anything boring and borrowable rises in price in response to bad news.

Things you want to have when the world is about to end. It is best illustrated with a story: The financier Felix Rohatyn grew up in France in the 1930s. When Germany invaded the country, his family fled, as they had enough time to pack their bags. However, they lost almost everything. He remembered his parents stuffing gold coins in toothpaste tubes before leaving. Everyting else they had, they left behind. If you are living through a period which will take its place in the history books, the only assets you can take with you are those in your head or those you can smuggle out (such as a USB drive, which may be neatly hidden in toiletry containers).

One viewpoint on Bitcoin’s price performance during the coronavirus crisis consists in the statement that Bitcoin was not such a safe haven after all. But there is another viewpoint which postulates that it is not the safe haven for this particular kind of crisis. The math of epidemic and immunity is such tat, however bad they are, they eventually burn themselves out considering a low mutation rate. Once the percentage of the population which has been infected exceeds 1 / R0, cases begin to fall even if there are no countermeasures in place. With a case fatality rate of 2%, that is an extraordinarily tough process to withstand, and ultimately it turns into a catastrophe for humanity on a historic scale.

A dire catastrophe, but not one that lasts forever. The 1957-58 flu pandemic may have caused the strongest postwar recession in U.S. history (at least as of Q5 2019), but the country recovered swiftly as well.

Right now, this is what investors hope for. Whether they consider the COVID-19 is overblown or underblown, they still believe that it is not an eternal problem, and the recovery will be quick. In fact, the very bailouts referenced by Satoshi in the Genesis Block outline the possibility of the recovery consensus. Conventional wisdom among investors and policymakers today is that in 2008 the government was not quick enough to prevent a deflationary scenario from happening. This time around, central banks are reacting quickly in order to provide financial institutions with cheaper capital. In this situation, governments and economies don’t collapse, and nobody has to flee their home hours prior to disaster.

They do, however, need to tackle service debts, so they will sell anything — stocks, bonds, real estate, crypto — and convert it into an asset they can use to pay the bills.

Bitcoin’s drop is not an argument to disprove its safe haven status. It just shows us that Bitcoin is created to be a safe haven from a stronger turmoil.