Can cryptocurrencies become safe haven assets during the COVID-19 pandemic?

With the economic turmoil that erupted during the onset of the COVID-19 pandemic, it’s easy to see why investors would want to search for alternative assets that are less prone to market drops. While most analysts have suggested time and time again that Bitcoin is a safe-haven asset, the fact that its price fell alongside stocks during the onset of the pandemic shows otherwise.

What is a Safe-Haven Asset?

A safe-haven asset is a financial asset that investors turn to in order to protect themselves and even make profit during periods of market instability. This is achieved by limiting an investor’s exposure to market losses during downturns. Government securities, the US dollar, gold, silver, as well as defensive stocks are all prime examples of safe-haven assets.

The Case for Bitcoin

Despite many doubts when the value of Bitcoin dipped as low as $4,000, the cryptocurrency has recovered most of its value and then some. Not just that, but it has done so while most stock options are still trying to recover. All you have to do is to look at its current value at $11,434.10. Such a recovery would easily attract investors and would also give off the impression that it is indeed a safe-haven asset, thus making now a good time to learn how to buy Bitcoin. Is Bitcoin a reasonable investment? Yes.

Is Bitcoin a Safe-Haven Asset?

In order for an asset to be deemed a safe-haven asset, it must satisfy two conditions:

  • Asset Volatility Must Be Low

We are all aware that the volatility of any cryptocurrency has never been low. In fact, the high volatility of Bitcoin is one of its defining traits. By this information alone, we can already disqualify Bitcoin from being recognized as a safe-haven asset.

  • Increased Asset Value When Market Volatility Is High

While it’s true that the value of Bitcoin rose much quicker than that of other investment options, this is not because of an inherent trait in the asset, but rather because of an external event known as the “Bitcoin Halving”. In essence, this is a process where the rewards for Bitcoin Miners are reduced by half, hence the term “halving”.

This process occurs every 120,000 transactions and is used as a measure for Bitcoins to retain their value by controlling the number of Bitcoin produced for the miners. Their value is preserved through their scarcity and the resulting demand.

Another thing that prevents Bitcoin and other cryptocurrencies from becoming safe-haven assets is that it’s difficult to convert these currencies into fiat currencies. Even though many parts of the world are now more open to digital currencies, these efforts are not enough to make the process as seamless as that of alternatives such as encashing a check or withdrawing money from an ATM.

While Bitcoin is not a safe-haven asset, it’s clear that its value is still high.These difficult times make any sort of market prediction near-impossible, and it’s understandable to see why investors are desperate to find safe-haven assets besides those that we already have.

About Author

Collin is a Bitcoin investor of the early hour and a long-time trader in the crypto and forex market. He's fascinated by the complex possibilities of blockchain technology and tries to make matter accessible to everyone. His reports focus on developments about the technology for different cryptocurrencies.

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