Considering 2020 has been a wild year for Bitcoin and the token still maintains gains despite high volatility, there are a lot of people questioning whether the largest cryptocurrency in the world has indeed become a safe haven. Since there are reasons to believe it is and not too much, a broader debate on the matter is necessary to help people treat Bitcoin objectively next time financial markets are rattled by an unexpected event like COVID-19.
Alt-text: Bitcoin safe haven
Strong demand and price rising
Even though the pandemic had generated the worst economic downturn in decades, Bitcoin had outperformed most asset classes since March. There had been strong demand for the most popular crypto and because of large inflows, the price moved higher, topping near $12,400 several weeks ago. Compared to the beginning of January, the price continues to maintain gains, despite a pullback lower, communicating BTC had been a good investment to prevent the deflationary shock witnessed during Q1.
Elevated volatility – still a major concern
Any beginner’s guide to trading crypto will highlight that these instruments carry increased volatility and because of that, uncertainties will arise. The first reason why Bitcoin should not yet be considered a safe haven comes from its wild price performance. So far, there doesn’t not seem to be any change, considering it topped near $20,000 in early 2018, dropped to $3,000, spiked to $13,800, dropped again towards $4,000 this year, only to recover since then.
A safe haven asset has a more stable valuation and investors are looking after it during times of uncertainty mainly because the long-term performance is inspiring enough confidence. There could be a lot of arguments against Bitcoin with this respect, for now.
Outperformance in US dollar terms
Usually, when an economic downturn occurs, the US dollar, as the global reserve currency, is appreciating in value, due to a funding gap on international markets. The same happened in March, but aggressive actions from the Federal Reserve prevented that from moving forward. Ultimately, the dollar weakened not just against other fiat currencies, but against Bitcoin, as well.
Despite high uncertainty, investors had favored Bitcoin against the most important currency in the world, suggesting their view on what are the new safe havens today could have changed. Also, it could be viewed as a short-term increase in risk sentiment, fueled by monetary and fiscal interventions around the world.
Bitcoin popularity – a lot of room to grow
Ultimately, a safe haven is a very popular asset. Even people outside the financial industry know something about government bonds and for decades, these assets had been a place of refuge for investors, when economic activity was uncertain. Could we say the same about Bitcoin? Its popularity is increasing due to massive media coverage, but there is still a lot of room to grow until the cryptocurrency will become very popular. Mass adoption continues to be far away in the future. However, even though a small percentage of investors/traders are involved in Bitcoin, that seems to be enough to generate enough demand, at a time when new supply is shrinking every 4 years.