What Covid19 Showed Us About Bitcoin
Christopher Flinos, Co-Founder, HAYVN,
www.hayvnglobal.comBitcoin has lost about 35% of its value in the last month's market rout. Many feel it shouldn't have. That it should have rallied like gold and Clorox stock to protect investors in times of market capitulation. This resulted in a discussion amongst the management team about what is Bitcoin, how should investors define it and its role as a safe haven. This digital currency has been compared to a currency, a commodity, an investment asset or even said to have no underlying value at all. So how do we see it after being on the receiving end of it this month?
We can begin to define it by understanding what Bitcoin has shown us. It has no positive correlation with gold… no matter how much we wish it was. It has no negative correlation to share prices, investors don’t rush to it when other markets are plunging. It has no 'end of the world' premium or value when a virus is perceived as threatening our way of life. Coronavirus was the perfect storm for Bitcoin, an end of days style event, and it failed.
So therefore by definition Bitcoin can’t be a safe haven because a safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Bitcoin doesn’t do this. It is uncorrelated to the market (has no relationship) rather than negatively correlated (goes up when others go down) as there is no negative correlation coefficient. You can see this in the way it appears to randomly trade upwards or downwards regardless of real world news. It also isn’t a hedge as it doesn’t reduce the risk of any other asset as there is no statistical correlation to rely on. So it’s uncorrelated, volatile, not a store of value or an alternative to the USD, it is not a safe haven and can’t be used to hedge anything accurately.
So in the absence of it being anything else, Bitcoin at the moment is just a diversifier. Diversifiers are non-traditional assets that provide exposure to different groups of investment opportunities. They are complementary assets that sometimes include real assets, real estate, currency, alternative stocks and alternative bonds and in this era, Bitcoin and the other digital currencies. And they are a critical part of any investment portfolio. Something that satisfies the human mind that it isn’t part of the herd that missed out when the price of Bitcoin takes off and yet something to dismiss as unimportant when it plummets. Something that a portfolio manager can allocated 1% into to give some diversification to reduce the volatility of an overall portfolio. Yes… Bitcoin is a diversifier and should have a responsible place in any portfolio. I don't think Satoshi created it so that it would just be a diversifier. .. he had an expectation that it would be so much more. But its trading pattern and its movements in times of crisis betray it. No safe haven, no hedge, no alternative currency, just another store of value losing value in a market downturn. A diversifier.