With the US Federal Reserve slashing interest rates for the first time since the financial crisis and the birth of bitcoin, and other central banks around the world following suit, including New Zealand, India and Thailand, we talked to some experts in the field on whether cryptocurrencies will be a ‘safe haven’ asset in the event of an economic downturn.
Global economic instability appears to be intensifying after central banks around the world recently slashed interest rates, and the US-China trade war escalating after the devaluation of the yuan. With all of these events pointing to a global trend of monetary policy easing, the commentary below looks at the impact this might have on cryptocurrencies.
Lars Seier Christensen, Chairman of Concordium, the next-generation, decentralized world computer and the first with ID-verification built-in at the protocol level, commented:
“It’s hard to know how cryptocurrencies will perform in the event of a recession — it could go either way. While there may be a certain safe haven effect in bitcoin, it may also suffer as investors adopt a risk-off approach, and other cryptocurrencies without the enthusiastic followers that bitcoin has may be most vulnerable to a risk-off approach.
In general, I think bitcoin is a non-correlated, volatile asset driven by die-hard maximalists and often manipulative, two-way players. Bitcoin movements are close to random and I think there is little predictive value to be found in the general economic conditions.”
Iain Wilson, Advisor to NEM Ventures, the venture capital and investments arm of the NEM blockchain ecosystem, commented:
“Whether Bitcoin performs in a recession will be heavily dependent on the reaction function of Central Banks. The consumers’ experience to date of zero/negative interest rates has tended to be from higher asset price inflation (stocks, houses and government bonds), rather than an explicit negative cost to their savings. With many developed countries failing to normalise rates post the financial crisis, we now potentially face entering a Global recession with very limited room to cut nominal interest rates.
Consumers face the prospect of Central Banks applying aggressive monetary easing with explicit costs to holding cash deposits in banks and restriction of high value banknotes in circulation. Assets such as Gold, which has traditionally been held by large investors as an uncorrelated asset hedge, are harder to access as an individual and lack portability. Hence we see this economic environment as being highly positive for digitally scarce crypto assets.”
Kevin Sekniqi, Co-Founder and Chief Protocol Architect, and Amani Moin, Chief Protocol Architect (Cryptoeconomics) at AVA Labs, commented:
“Scarcity is not enough to be digital gold, despite popular belief. Empirically, at least, Bitcoin does not appear to be a safe haven during times of economic turmoil. This could change as public opinion shifts, but the current data does not support the narrative. Simply put, BTC returns do not meaningfully correlate with any indicators of downturns.
Annual correlation of BTC returns with gold returns, US equity uncertainty, US economic policy uncertainty, and the federal funds rate are generally not statistically distinguishable from 0 in most years.
If BTC was a safe haven, we would expect a positive correlation with all of these things except the federal funds rate. We will point out that there is a correlation with gold in 2016 and 2019, but this may be spurious since BTC correlation with gold changes sign from year to year and is not statistically significant in most years.
It is not clear whether BTC is truly a hedge, because ultimately we do not yet have enough data. It is difficult to extrapolate Bitcoin’s use as a hedge using only data from when markets are good. Although the data up to now does not seem to indicate with any measure of statistical significance that BTC is truly a hedge, BTC existence does not overlap with any of the National Bureau of Economic Research’s recessions, and thus claims are still not conclusive. Ultimately, if people truly believe that Bitcoin is digital gold, Bitcoin may indeed become a hedge.”
Jehan Chu, Co-founder of Social Alpha Foundation and Managing Partner at Kenetic, commented:
“In today’s markets where nothing is sacred, Bitcoin is increasingly compelling as a digital safe haven. Family offices from across Asia and Europe are stepping into digital gold as not only an option on the future, but a shelter from the present turmoil. When the dust settles, Bitcoin will emerge as a normalized asset class.
Bitcoin as the biggest and most recognizable brand in crypto will gain the most from capital seeking safety. Other cryptocurrencies may benefit in part, but will largely need to compete on the fundamental value of their utility. The dark horse winner may yet be the bloom of stablecoins coins like Facebook’s anticipated Libra, the controversial market leader Tether, and smaller but rapidly growing regional coins like Terra based in Korea.”
Charles Phan, CTO of Interdax, the all-in-one cryptocurrency exchange providing a safe, secure, and more efficient platform to the masses through innovative derivatives contracts, commented:
“Regardless of whether bitcoin is a good store of value, it is known that investors looking to construct diversified portfolios have use for uncorrelated assets. Particularly in a crash situation, there is a tendency for correlations to spike, so that traditional portfolios that seem uncorrelated are suddenly highly correlated, leading to outsized losses. We have not yet seen a major financial crash during the life of Bitcoin, but investors should be considering whether such an event will see it moving with risk assets or against. The minor wobbles of the past 10 years suggest that it would indeed be a good hedge, as transpired during the post-Cyprus bailout period back in 2013.
This anti-correlation effect may well be connected to geopolitical events such as capital flight, which is a reasonable mechanism explaining why when there’s bad news for risk assets, Bitcoin rises. It may not be direct in that the capital flight is the entire bid, but a form of self-fulfilment in the expectation that the market will move the way that makes it act as a hedge. Certainly, many commentators would position Bitcoin as an asset similar to gold, and this has a coordinating effect on participants.”