Bitcoin fails its test as a haven in times of global turmoil

Where’s the button?
Where’s the button?
Image: KCNA via Reuters
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Bitcoin—the biggest and best known cryptocurrency—is falling along with stocks and other assets following a provocative nuclear test by North Korea over the weekend. If you believe non-state-controlled digital currencies are the havens of the future, traders aren’t treating bitcoin like one today.

Gold and even the Japanese yen (Tokyo is about 800 miles from Pyongyang) are outperforming bitcoin during the latest bout of global tension about North Korea’s nuclear program:

The recent drop in cryptoassets has also been attributed, in part, to China’s crackdown on initial coin offerings, with the central bank calling crypto token sales an “illegal fundraising practice.” Bitcoin’s sensitivity to the news doesn’t bode well for its future as a reserve asset. Its price peaked on Sept. 2, around the time of North Korea’s hydrogen bomb detonation and has since fallen. China published its statement on ICOs on Sept. 4.

To be fair to cryproassets, the US dollar is a global reserve currency and it hasn’t behaved much like a haven, either. That’s because anything that reduces the likelihood of US president Donald Trump’s proposed tax cuts—like the distraction of North Korea launching missiles—increases the probability that the Federal Reserve will try to stimulate the US economy (via lower interest rates), according to Alberto Gallo, head of macro strategies at Algebris Investments. (All bets are off if a nuclear-tipped rocket actually leaves the launchpad, of course.)

Bitcoin seems to offer respite during smaller-scale, localized crises: Venezuela is the latest country to embrace the cryptoasset as its economy and currency cratered. One reason bitcoin may not offer safety during times of broader turmoil is that the market is simply too small. A large institution probably wouldn’t be able to buy enough of the cryptocurrency to hedge its portfolio against geopolitical risks.

This may not always be the case. While the amount of bitcoin in existence is limited by its own algorithms, the supply of derivatives linked to bitcoin is theoretically infinite. Derivatives exchange CBOE is developing futures tied to bitcoin, and the financial industry has been trying to develop an exchange-traded fund linked to it. If, or when, institutional money throws its weight behind the cryptocurrency on a big scale, bitcoin may behave differently during times of crisis.