Op-Ed: Bitcoin may not be a safe haven but seems to be in recovery mode

Posted Oct 15, 2018 by Ken Hanly
While there is as yet no analysis of Bitcoin price movements today by Omkar Godpole on CoinDesk there was an analysis yesterday on CoinDesk by Godpole and two other authors arguing that Bitcoin was not a safe haven but a risk asset.
Illustration by Digital Journal
Bitcoin as a safe haven
While many both within and without the cryptocurrency movement have warned of the extreme risks involved in investment in the cryptocurrency area some have argued that a coin such as Bitcoin actually can act as a safe haven in turbulent times much as gold does for investors in the stock market.
The authors of the CoinDesk analysis phrase the argument as follows: "Bitcoin, the cryptocurrency advertised as digital gold due to its difficult means of production and limited supply, is expected by some to act as a "safe haven asset," one that rises or remains stable in times of economic turmoil (just as its metal companion traditionally has)."
Reasons Bitcoin is not a safe haven
The volatile price swings make Bitcoin a poor choice for a safe haven. While it did trade for some time with low volatility lately this is not the rule but more the exception. It also suffers from dropping values this year not the ideal for a safe haven. The article points out that the stock markets too can suffer from both these features. However, the stock market is not regarded as a safe haven unless perhaps when there is a strong bull market. While stock markets are risky investments they are regarded by most as much less so than the cryptocurrency market.
The article notes that Bitcoin as the stock markets has taken a notable dip since October 10 and to about the same degree. Of course late last year, Bitcoin outdistanced anything the stock market could do rising up to almost $20,000 a coin and has fallen since then further then the stock market ever could as it traded the other day about $6,200 less than a third of its high value.
Certainly, as the authors argue Bitcoin has acted more as a risk asset than a safe haven.
Charts tell a similar story
Charts comparing the price of BTC and the S & P index show a similarity in price action and direction with both showing a notable dip in September and October. It has often been the case that when Bitcoin gains in value so does the SPX and vice versa. At the end of September prices peaked for Bitcoin and fell when the month of October began. The SPX also acted similarly. For now the article argues that SPX index is providing a signals for what will happen in the Bitcoin market in a day or two. I doubt that this correlation extends through the earlier part of this year when the stock market kept rising to new heights while Bitcoin along with much of the cryptocurrency market continuously lost value.
Bitcoin as a risk asset
The authors describe a risk asset as one that has significant price volatility and does not offer fixed returns. The prices of risk assets tend to rise when the domestic and global economy is growing. Stocks do not offer a guaranteed return and usually increase in value when the domestic and global economy are growing. The authors regard emerging market currencies, base metals, and oil as risky assets that follow the price actions in major stock markets.
Some stocks also offer dividends and so do offer fixed returns although they can increase or decrease over time. The authors point out that the bitcoin market has been historically quite volatile. They also claim that the price of Bitcoin closely follows the stock markets. I doubt that this is the case over an extended period of time. Remember that Bitcoin was worth virtually nothing for ages not even equivalent to a penny stock. The first purchase with Bitcoins was of two pizzas for 10,000 Bitcoins. Cryptocurrencies unlike most stocks do not have assets such as oil, manufacturing plants, etc backing them up which can be valued independently of the stock price. For the most part, cryptocoins can only be valued by their market price.
No doubt the authors are correct that Bitcoin is likely to be treated as a risk asset by most or many investors. However, they argue that as there is more adoption of Bitcoin it will be looked at more of a safe haven. There is a sense in which it serves as a key coin in that when the cryptocurrency market drops and investors are risk adverse, Bitcoin becomes more dominant and money is parked there or bitcoin is used to then transfer to US dollars. When there is more risk appetite money flows through Bitcoin into alternative coins and Bitcoin becomes less dominant.
Bitcoin price at present
Bitcoin experienced a sharp drop a few days ago but stayed above the significant $6,000 level as discussed in a recent Digital Journal article. However, the charts showed many bearish signs and it was thought that there could be an even further significant drop in price. This has not happened.
On October 14 UTC the price opened at $6,227 and traded mostly sideways with a high of $6,302 and a low of $6,212. On October 15th it opened just a few dollars lower than the previous open at $6,222 however it jumped up as high as $6,960 almost to the $7,000 level. Even after falling back it ended the day at $6,513 almost two hundred dollars above the open.
It is now October 16 UTC. At 02:09 the price of Bitcoin was $6,498 just shy of $6,500. So far it looks as if the bears are failing to push the price down below the $6,000 level and there may even be a bullish reversal on the way. We will see later in the day. The present price of Bitcoin can be found here.