Market Test on the Bitcoin Safe Haven Narrative
— March 31st, 2020 by TokenInsight Research
Author: Julio Wu, Johnson Xu
Contact: johnson@tokeninsight.com
Overview
Based on the analysis of the market performance on number of typical safe-haven assets during the 2007–2008 Global Financial Crisis (GFC) and the performance of Bitcoin during the recent global market downturn, we have concluded that bitcoin is not a safe-haven asset.
Bitcoin’s safe haven attribute can only be recognised once it is fully tested by the market during this broader market panic. According to the analysis, we speculate that Bitcoin may find its way to becoming a brand new type of safe-haven asset in the future if the narrative realises.
The Bitcoin Market Test
Safe-haven assets are investment assets that can maintain price stability or growth when the market is in distress. Currently, precious metals, government bonds, public facilities & medical stocks, and currencies such as US dollars can be considered as safe-haven assets.
Performance of Safe-Haven Assets during the GFC
Among them, MSCI USA Defensive Sector is composed of stocks in medical, energy, and public facilities, and it is a representative of a safe-haven asset portfolio. It can be seen that the safe-haven assets gained value in the initial stage of the market downturn (i.e., Stage 1), after reached its peak, the safe-haven asset class moved downward with the broader market(i.e, Stage 2) and subsequently recovered before the broader market does (i.e, Stage 3), this characteristic is one of the safe-haven characteristics recognied by the market.
The 1st stage is the stage of divergence. Due to the influence of panic, funds flow from risky assets to safe-haven assets, and the prices of two types of asset diverge. The 2nd stage is the redistribution phase, the overall market sentiment is low, and the two types of assets plummet simultaneously. The 3rd stage is the recovery phase, in which the safe-haven assets took the lead to step out of the market haze.
Bitcoin’s Performance in the Current Market Cycle
When the entire market declines sharply, the safe-haven assets will also fall (rather than continue to rise); currently, Bitcoin is going through this process. If Bitcoin stabilizes earlier than the broader market, it’s safe-haven characteristics can be seen as relatively mature.
Bitcoin May Become a Brand New Type of Safe-Haven Asset
The Characteristics of the Equity Safe-Haven Assets
Summarizing the fundamental information of the above ten stocks and comparing with the broader market, we can discover that they have the following common characteristics:
· Price: Slightly higher than market benchmark (+10%)
· Market Value: Lower than market benchmark (-30%)
· Growth: Slightly lower than market benchmark (-5%)
· Quality of Financial Statement：Higher than market benchmark (+20%)
· Dividends: Higher than market benchmark (+35%)
· Volatility: Lower than market benchmark (-20%)
- Market- benchmark Based on MSCI ACWI IMI
Bitcoin May Take a Different Path
The following chart shows the value of the above characteristics between Bitcoin and the market benchmark. It can be found that the difference between Bitcoin and the market benchmark does not meet the characteristics of a safe haven asset.
We also performed correlation analysis on the returns of Bitcoin, Ethereum, NASDAQ index, S&P 500 index and gold for the week of (2020.3.3–2020.3.10). The results demonstrate that both Bitcoin and Ethereum were weakly positively correlated with the stock index and weakly negatively correlated with gold; indicating that Bitcoin has not yet exhibited similar safe haven attributes as gold in this current market cycle.
In summary, the difference between Bitcoin and equity safe haven assets is significant, and the current market statistics were only weakly positively correlated with gold, therefore, if Bitcoin becomes a safe haven asset, it could be a new category.
Final Thoughts
The March 2020 broader market plunge was caused by COVID-19 pandemic and uncertainty on the economy on a global scale. The sharp downturn, panic sell-off of major liquid assets and lack of buy-side liquidity caused rapid evaporation of the capital within the market. We believe once the market sentiment quickly shifts its turn, the market may begin to shift towards safe-haven assets.
The cryptocurrency industry generally belives bitcoin as the “digital gold” and believes it pocesses hedging characteristic foundamentally. However, according to the analysis, Bitcoin does not fall under the two types of safe-haven assets according to the broader market rules. In other words, if the bitcoin safe-haven asset characteristic realise in the future, we speculate that it may become a brand new type of safe-haven asset, otherwise it is just a wishful thinking in the industry.
About TokenInsight
Founded in 2017, TokenInsight is a Leading Data & Tech Driven Blockchain Financial Institution. TokenInsight pioneered a complete blockchain industry classification system, covering more than 1,600 projects, releasing more than 300 rating reports, and conducting in-depth studies into 10 major industries.
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