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Bitcoin: The New Digital Gold?

Bitcoin's tumble from 91,000AUD to 29,000AUD over the last year is the result of investors dumping riskier asset classes amidst global monetary tightening. However, despite the U.S. reaffirming monetary tightening through a 0.75 percentage-point interest rate rise, this logic has been upended as Bitcoin is up 3% over the past week. Even though the recent performance of Bitcoin has been choppy throughout September, if it breaks its key resistance point of 30,000AUD, investors will continue to buy it.

Source: The Times

Talks of a recession are pervading financial markets and the historic low reached by the pound reaffirms this notion. It is axiomatic that investors turn to havens during recessions to mitigate risk. It follows then, as many now claim, that Bitcoin is currently perceived as a haven by the market as its recent growth is correlated with the increased noise surrounding a recession. Nevertheless, there is something discomforting in this claim as the collapse of Bitcoin per se was the result of distrust in riskier asset classes. There is no consensus that Bitcoin is a haven (Yatie, 2020). Yet, closer inspection of its properties, at least on a theoretical basis, points toward the claim that I felt uneasy writing before. Its theoretical attractiveness boils down to its separation from traditional asset classes and economic policy. Thus, Bitcoin stands as a useful hedge against U.S. dollar fluctuations, Euro indices, equity markets, and ETFs.

Recent academic studies (Yate, 2020; Bouri et al., 2020) point toward Bitcoin as a strong diversifier that can mitigate portfolio risk during recessions. Furthermore, cryptocurrencies like Dodgecoin and Cardano were empirically found to be more efficient havens than gold during the COVID-19 market crash (Yate, 2020). Alternative studies point toward the internet riskiness of Bitcoin and argue that it holds neither a diversification benefit or a haven quality (Shahzad et al., 2019; Colon & Gee, 2020).

While some of the literature points towards it being a haven given it is de-coupled from traditional financial markets (Corbet et al., 2019), the recent statistical data does not support a claim that it is a haven (Yate, 2020). Bitcoin was found not to hold haven properties like gold during the COVID-19 market crash (Yate, 2020). This is because it was used primarily as a diversifier but showed some hedging features (Yate, 2020). Therefore, we must be careful in categorically viewing Bitcoin as a haven.

In any case, it will be difficult to discern whether Bitcoin holds this haven quality in the short-term. It is fluctuating around its resistance point of 30,000AUD and if it rallies over this point, it will be difficult to recognise whether its growth is based upon its haven quality or its potential price benefits. Yet, all things considered, the latter is more plausible.

Bitcoin is in its own lane watching the global markets slow down behind it as it continues to strive forward. While it forms into a more emphatic tick by the hour, it will be for time to tell whether it is or will be a haven.


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