Is Bitcoin correlated with safe havens?

The question whether Bitcoin could be considerated as a safe haven is as old as the most famous cryptocurrency. Indeed, the question is rather strange, as the volatility level and possibility to be stolen surrounding Bitcoin is clearly at odds with the definition of a safe haven. And empirical evidence shows that Bitcoin has not performed like a safe haven asset to date.

Last November, an article published on charted Bitcoin’s correlation with gold, the most well-known traditional safe haven, over the past four years and showed that the 90-day correlation swings between a positive one and a negative one, meaning that sometimes the cryptocurrency rises when gold rises and sometimes it falls. More precisely, it emerged a slightly negative correlation between the two assets, which has become slightly weaker over time. The conclusion was that there is certainly no positive correlation to gold, at least not for any meaningful length of time. Should we conclude that Bitcoin is not a safe haven?

To tell the truth one might argue that despite its reputation as the ultimate safe haven, gold itself hasn’t always performed like a safe haven. But, unlike gold, neither has Bitcoin ever shown any consistently negative correlation to stock markets, nor investors have ever bet on Bitcoin when stock markets were going down or when risks to the global economy were evident.

Let’s state another important conclusion. Those who define Bitcoin as a “safe haven”, are thinking about its uncorrelation with other assets; indeed, these two features are not incompatible. Safe havens are usually bought by traders in bad economic times (during trade and military wars, for example) and they therefore tend to rise when there’s market uncertainty. Nevertheless, the absence of correlation may be due to a more simple “random walk” hypothesis, which is one that, in the case of Bitcoin cannot be excluded at all.

Those who mantain that Bitcoin is an ‘uncorrelated safe haven’ say something wrong. A safe haven is an asset investors buy when ‘risk-assets’ fall. Investopedia defines it thus: A safe haven is an investment that is expected to retain or increase in value during economic bad times. Safe havens are bought by investors to limit their exposure to losses in the event of market downturns. Therefore, safe haven assets are negatively correlated to stock markets, for instance, and positively correlated among themselves. This is why ‘uncorrelation’ of Bitcoin casts doubts about its being a safe haven. But many economists do not think so.

Bitcoin is making its case (as) an uncorrelated, safe-haven asset while stock markets fall. It is true that Bitcoin rose as much as +15.0% on the day the Dow Jones was on course for its biggest one-day fall since January. That day Bitcoin showed a negative correlation with stock markets. If it had continued to show this negative correlation, economists might have said it was behaving like a safe haven. But it had not. Empirical evidence shows that Bitcoin is uncorrelated both to safe havens and risk assets, such as stocks. This is enough to say it is not a safe haven.

Other economists mantain it is actually a hedge against the devaluation of global currencies. This is also false. A hedge is an investment undertaken to reduce the risk of adverse price movements where a trader takes an offsetting position in a related security. Gold is a good example of assets used to hedge against losses. But in the Bitcoin case there is no guarantee that if markets were to go down, it wouldn’t go down as well. Therefore, Bitcoin can’t be considered as a hedge, either.

Perhaps, the conclusion is that it is simply an useful asset to diversify portfolios. If a fund manager wants to put 1.0% of Bitcoin into his portfolio, it would certainly have obtained a diversified portfolio, ceteris paribus, though this would be a risky strategy. Yet, the uncorrelation is what guarantees the respect of the diversification principle.

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