When the going gets rough—stocks falling, interest rates in decline, debts mounting—investors look to “safe haven” assets, like gold, that are supposed to retain value while the rest of the world burns up. Cryptocurrency investors argue Bitcoin should hold a similar place in the financial firmament: a reliable fallback in times of crisis. It’s digital gold, they say.
But at this moment, when safe haven assets should be holding up, Bitcoin is sputtering. The cryptocurrency had its single worst performing day in seven years on Thursday when its price dropped from nearly $8,000 to below $6,000. Early Friday, its price plunged again, to below $4,000, before rebounding somewhat above $5,000. On Monday, it fell back below that threshold.
Why is Bitcoin getting thwomped right when many people expect it to perform best? Here’s how cryptocurrency investors explain the contradiction.
What’s the youth in trying
Bitcoin is still, little more than a decade old, young. “Bitcoin wants to be digital gold when it grows up,” says Wences Casares, CEO of Xapo, a digital wallet startup, and board member of the Facebook-corralled Libra Association, “but it is a toddler.” How long the adolescence will last is anyone’s guess.
With youth comes an element of danger. Linda Xie, managing director of Scalar Capital, a cryptocurrency investment firm, considers Bitcoin to be somewhat schizophrenic. “I think Bitcoin acts as both a safe haven and speculative risk asset,” effectively a gamble, she says, paradoxically. Xie says she believes that “in the long run it will be more widely perceived as a safe haven,” but that time has yet to come.
The present-day peril of investing in the digital coin is obvious. “Bitcoin is certainly a risk asset,” says Ari Paul, the chief investment officer at the cryptocurrency investing firm Blocktower Capital, “albeit a lower correlated one than most,” meaning it generally does not move with the stock market.
The recent market rout may call that supposed lower correlation into question.
Ride together, die together
Last week Bitcoin and the rest of the incumbent financial system swung low together. That’s semi-unusual for the cryptocurrency’s history.
For much of its existence, Bitcoin’s performance has been mostly uncorrelated to the stock market, as the below chart, provided by CoinMetrics, a cryptocurrency market research firm, shows. When compared against the S&P 500, a common stock market index, Bitcoin’s correlation oscillates near the zero mark—meaning it is largely its own beast. (On the vertical axis: Zero means uncorrelated, “1” means correlated.)
Is the recent tie-up an anomaly? “While some folks suggest that the last 45 days discredits the prior five years, I don’t think that’s a reasonable view,” says Kyle Samani, managing partner at MultiCoin Capital, another cryptocurrency investing firm. Samani notes that even yields on U.S. government treasuries have been fluctuating wildly lately, which is significant since the federal bonds are also generally considered a kind of safe haven.
Most times, Bitcoin marches to its own idiosyncratic tune. (Stampedes, really.) Like real estate versus equities, Bitcoin behaves uniquely. But when sudden, recession-worthy jolts rock the system, everything can change.
No risk, no reward
Despite Bitcoin’s growing pains, cryptocurrency investors remain optimistic about the future of their digital gold.
Boosters still see the precious metal as a useful point of comparison. MultiCoin’s Samani believes history will repeat itself. “In 2008, gold dipped ~32% before rallying,” he says. “I’m expecting a similar trajectory for Bitcoin in the coming months.”
BlockTower’s Paul expects similar performance—with a difference. “Bitcoin has been and will likely continue to be more volatile in both directions” than gold, he says. “It’s already sold off more than gold did in 2008, and I expect it’s eventual rally to be substantially more parabolic,” meaning its price chart will feature an even steeper upside gain.
Skeptics dismiss these rosy forecasts as wishful thinking.
Peter Schiff, a goldbug investor and CEO of Euro Pacific Capital, disagrees with any comparison of Bitcoin to his beloved bullion. Bitcoin is “nothing. It’s a way for people to gamble. It’s a lottery ticket on a pipe dream,” Schiff says. (Schiff proudly notes that a group of cryptocurrency fans recently awarded him the title of “most clueless Bitcoin no-coiner,” crypto-speak for someone who pooh-poohs cryptocurrency.)
“The name of the game is to get out, but its investors have to sucker people in to have somebody to sell to,” Schiff says.
Havens and haven-nots
People buy and sell assets for any number of reasons, and basing one’s investment decisions on a single, simple narrative is a mistake. No bet is a sure bet—even for a supposed safe haven.
When investors need money, and need it quickly, they’ll sell anything. Not even gold can escape as the ballast that gets tossed overboard when a sinking ship requires buoyancy. Bullion dove in 2008; it dipped 4% on Monday amid the market-wide sell-off too.
If Bitcoin is, one day, become a safe haven, it will be on the merits of its inability to be confiscated by governments, say some investors. “It’s a ‘safe haven; in terms of it being seizure resistant, not in terms of price stability,” Paul says. “It may eventually become a safe haven in purchasing power, but certainly not today.”
Dan McArdle, a cofounder of Messari, a cryptocurrency market tracker, elucidated the thesis in a Twitter thread a couple years ago. Bitcoin is not disaster-proof, he said. “It’s value over the long haul stems from inflation resistance, being able to function as money if confidence in fiat is lost, & inability for banks/govs to seize it.”
Bitcoin may be a haven, but it’s by no means a safe one—at least not yet. “While many in the Bitcoin industry have been hailing Bitcoin as a new safe haven, at this point it seems clear that proponents of this status have probably gotten a bit ahead of themselves,” says Chris Bendikesen, head of research at CoinShares, a digital asset investment firm. “To be clear, this does not mean that Bitcoin is somehow forever barred from attaining such status, but it seems clear that this status has yet to be established.”
Bitcoin may one day grow up. In the meantime, better to play it safe, and, for anyone determined to get involved with it, treat cryptocurrency like a game of chance.
You could lose whatever you invest.