28 January 2020, 21:01
2 min reading
It wasn’t long ago when media outlets labeled Bitcoin as a “safe-haven asset” following its upward reaction to Donald Trump’s promises to escalate the so-called US-China Trade War. From journalists to market analysts, Satoshi Nakamoto’s cryptocurrency was quickly perceived as some sort of “digital gold” — one that increases in value during periods of market
It wasn’t long ago when media outlets labeled Bitcoin as a “safe-haven asset” following its upward reaction to Donald Trump’s promises to escalate the so-called US-China Trade War.
From journalists to market analysts, Satoshi Nakamoto’s cryptocurrency was quickly perceived as some sort of “digital gold” — one that increases in value during periods of market turbulence. And for some time, it did. But, as you could imagine, this behavior didn’t last long.
The tension between Washington and Beijing, as well as Tehran, seems to be playing a decisive role in aligning the performance of both assets. But… is this alleged correlation enough to claim that Bitcoin is rising on the back of the Coronavirus outbreak? Let’s find out.
The first half of 2019 showed an inverse correlation between Bitcoin and Gold, with the yellow metal displaying modest gains and the cryptocurrency unfrozening after the “Crypto Winter”.
As both assets approached the month of June 2019, a rising geopolitical tension pushed both Bitcoin and Gold to the green side and allowed them to outperform global treasuries and even the MSCI emerging-market index.
The similarity between the two assets raised questions among the financial community: “Are Bitcoin and Gold correlated?” “Is Bitcoin a digital safe haven asset?”… The list goes on.
During a testimony before the Senate Banking Committee on Facebook’s Libra Coin, the Chair of the US Federal Reserve, Jerome Powell, outlined that both the metal and the blockchain-based currency are indeed speculative stores of value.
“Almost no one uses bitcoin for payments, they use it more as an alternative to gold […] It’s a speculative store of value,” he told the committee on July 11, 2019.
While those words were more than enough for the cryptocurrency community on Twitter to blindly claim Bitcoin was a “digital gold”, the numbers painted a quite different reality.
The chart above shows the 90-day pearson correlation between Bitcoin and Gold. In the graph, you can easily realize that the correlation is not even positive many times. In other words, when the correlation is negative, it means the compared assets move in a different direction.
In case you haven’t heard, the year 2020 has already kicked off with a few major events, including the coronavirus. But it wasn’t the outbreak that boosted Bitcoin prices in the first place, it was the killing of Iran’s top military commander, Gen Qasem Soleimani on January 3.
The US-led drone attack was followed by a promise for “severe revenge” and the end of the 2015 nuclear deal, signs that more developments are yet to come from the Middle East.
Logically, U.S. stocks dropped on the news as market players weighed the conflict between the two countries and a potential escalation into a long damaging conflict. For Bitcoin, this event unleashed a 7-day rally that took it from nearly $7,000 to $8,400. Surprised?
According to market analysts, Bitcoin was used as a hedge against potential inflation and the obvious consequences of an armed conflict between the US and Iran would trigger.
Only minutes after the killing was announced, oil prices skyrocketed over speculation of supply shortages. Iran is one of the world’s major oil producers.
Also, speculators are focusing on the possible role the cryptocurrency might play for the nation. With inflation ramping up quickly, citizens and even the government are considering alternatives to safeguard funds against a full-scale devaluation.
The Iranian government has so far issued over 1,000 licenses for cryptocurrency mining. “Our studies show that the crypto mining industry has the potential to add $8.5 billion to the economy,” said Amir Hossein Saeedi Naeini, an official at the ICT Guild Organization.
The facts mentioned above give us reasons enough to wonder if the coronavirus is good for Bitcoin or not. Well, as it turns out, the deadly virus that has already infected over 6,000 people worldwide is boosting the value of Bitcoin, considerably.
Wait… No idea what is the “Coronavirus”? Okay, no need to ask Siri. Let’s put you up to speed. The virus we’re currently dealing with belongs to the coronaviruses family, which typically originate in animals. That’s why most early-stage infections occurred near a seafood wholesale market in the centre of Wuhan, which also sold livestock.
Check live updates on the Coronavirus outbreak here.
This virus has already surpassed the number of Chinese SARS lethal cases in only several days, causing panic among civilians and, not surprisingly, markets too.
While the Wuhan virus epidemic continues to spread around the globe, Bitcoin has added nearly 6% in the last 48 hours. Yes — Satoshi’s currency is acting as a global hedge, again.
Historically, people turned to gold in times of high uncertainty or economic slowdowns. Yet, the “digital gold” seems to be an alternative rising in popularity among investors. In theory, Bitcoin is designed in a way that recreates gold properties (durability, fungibility, scarcity and portability).
China is the center of this epidemic. It is also a key market for Bitcoin and other cryptocurrencies. Chinese investors are used to rely on Bitcoin for hedging against the yuan’s devaluation and that might be one big factor behind the initial positive impulse on the BTC price.
So… the big question is: what’s next? If the coronavirus continues to spread throughout China and further, it could definitely hurt the global economy. Yeap, global.
Think about it. Wuhan — in case you didn’t know — is a key transportation hub in China, meaning plenty of products you consume might proceed from that location. The lockdown of that port not only impacts the GDP of the world’s second-largest economy, but also its clients.
And this situation isn’t just about trade deals. Ill people can’t work, travel, or shop. If not contained, the potential disruptions of this epidemic can be devastating for traditional markets and (very) profitable for uncorrelated assets.
Not so fast. Even if Bitcoin is so far reacting positively to the outbreak, it doesn’t guarantee its continuation. The renowned cryptocurrency expert David Gerard suggest “the bitcoin price is a game for whales to wreck the smaller players.»
«Anyone who claims the bitcoin price is in any way organic, or follows real-world events, is simply talking nonsense.»
When investors flee from equities and bonds, they seek shelter in safe-haven assets such as gold or even the U.S. dollar. And while there’s not sufficient evidence to include Bitcoin in that category, it’s definitely an option on the table. Mind the volatility though.