While some analysts have repeatedly described bitcoin as a safe-haven asset, its ability to offer protection during periods of market turmoil has come into question as its price has moved in tandem with risk assets like stocks.
Recently, the world’s most prominent digital currency suffered some notable losses, falling close to 20% in a matter of days.
Stocks have also had a hard time, with major indices experiencing significant declines. The Dow Jones Industrial Average, a benchmark index containing the stocks of 30 large companies, fell more than 2,000 points today, its largest drop in history, according to the BBC. Oil, a risk-on asset, also had a rough day, with U.S. West Texas Intermediate crude plunging more than 24%, CNBC reported. Investing in crypto coins or tokens is highly speculative and the market is largely unregulated.
Amid these conditions, some bitcoin enthusiasts have started voicing doubts about whether the digital currency does indeed provide investors with safety during times of macroeconomic turmoil. When analysts were polled for this particular article, they provided a range of perspectives. In an effort to explain the recent correlation between bitcoin and risk-on assets, some market observers pointed to a liquidity crunch, emphasizing that a lack of liquidity in stocks might cause similar problems in digital currencies, helping fuel losses in both asset classes.
Denis Vinokourov, head of research for London-based digital asset firm Bequant, spoke to this matter. “A liquidity event in equities will likely translate into worsening liquidity conditions in crypto because market participants will be forced to adjust their portfolios and deal with margin calls, alternative assets are unlikely to be prioritised,” he stated.
“The same goes for commodities such as oil and gold.” Further, Vinokourov stated that the current “broader market and liquidity event” was the main cause of bitcoin’s recent declines.
Michael Conn, founder and managing partner of financial services firm Quail Creek Ventures, offered a similar point of view, stating that “gold and other traditional safe-haven assets” have been “selling off recently due to the liquidity crunch.” “I still see BTC as a safe haven asset when the fundamentals come back into the market,” he said.
Joe DiPasquale, CEO of cryptocurrency hedge fund manager BitBull Capital, agreed, stating that “bitcoin is positioned very well to be a safe-haven asset.” He added that “crypto’s correlations are very dynamic as of now, shifting from equities to gold, depending on the prevalent situation.”
“The recent crypto sell-off, in tandem with global equities, merely represents a general risk aversion going into a possible economic crunch, and does not necessarily invalidate Bitcoin’s safe-haven status,” said DiPasquale.
Evan Kuo, CEO and cofounder of digital currency firm Ampleforth, provided a different point of view. “I don’t think Bitcoin is yet a safe-haven asset,” he stated. “I think it’s an uncorrelated risk asset, which is important to distinguish from a safe-haven asset.” “To protect from losses, investors will likely first retreat into dollars and bonds,” he added.
“Later, if they’re looking to add risk that’s uncorrelated with broader macro-factors they should consider Bitcoin due to its potential for appreciation.”