The risk of treating Bitcoin as a safe asset

There were many first attempts in 2020, but one of them was probably the first major and rapid pull in the market when Bitcoin existed. So how did Bitcoin? Researchers have looked at the data and are not motivated. Bitcoin fell in conjunction with many other assets. This does not go well for Bitcoin as a safe asset, at least not for S&P 500 investors. Of course, this does not eliminate the investment issue for Bitcoin, but it does mean that it would not. you should expect it to support your portfolio at times of market pressure. However, there are also reasons to think that the 2020 market downturn had some significant issues.

An Covid Drawdown

The market downturn in March 2020 was virtually unprecedented. Correlation between funds was very high for several weeks. Now, it is common for assets to move together in a bear market, but the price action we saw in March 2020 was real. Gold, for example, is generally considered a safe asset, but it has also seen a decline in the Covid – related market. So if gold was not performing as a safe haven at the time, should we expect Bitcoin?

Investor traits

One reason is that we do not expect Bitcoin to perform as a safe asset if it is used for profitability. If so, it’s no surprise that speculators would sell in times of market pressure. On the other hand, if it were owned by long-term investors, prices might be more stable when the market is in crisis.

Research suggests that Bitcoin was largely held in 2019 for speculative purposes. Bitcoin is often owned by traders who generally have risky concerns in general according to this research. Therefore, Bitcoin is less likely to perform as a safe haven asset because of its investor base.

Too early

One major challenge with Bitcoin is perhaps that it is too early to properly assess the features of the portfolio. Even with long-established assets, they can perform differently through different market cycles and you often need to look across multiple market cycles to create an informed view.

With Bitcoin of course, we can’t do that, because it hasn’t been around long enough. That said, a study of Bitcoin trading patterns by 2020 suggested a sharp shift and correlation with stocks in downward markets.

However, as Bitcoin grows over time so may its investor base and portfolio features change as well. While Bitcoin may have the potential to become a substitute for gold over time, for now it certainly does not trade as a safe haven asset.