Bitcoin Safe Haven Narrative in Question After Biggest Drop in 7 Years

Bitcoin (BTC) price is slowly recovering, reaching $5,500, after last week’s Black Monday style market meltdown which led to Bitcoin price pulling back sharply as traditional markets suffered the third worst trading day ever. Monday’s correction was followed by major cryptocurrencies - Ether (ETH), XRP, and Bitcoin Cash (BCH) all losing 11.6%, 8.3%, and 4.2%, respectively. 

Crypto market daily price chart. Source: Coin360

The dump in crypto prices has raised further doubts over the classification or use-case of Bitcoin and cryptocurrencies at-large. Bitcoin's safe haven argument as “digital gold” is being put in question as gold’s year-to-date returns surpassed Bitcoin and all other asset classes. 

Notable Bitcoin critic, Peter Schiff addressed the relationships between Bitcoin and traditional assets to claim its lack of value for investors:

“Bitcoin is no longer a non-correlated asset. It's positively correlated to risk assets like equities and negatively correlated to safe-haven assets like gold. When risk assets go down, Bitcoin goes down more. But when risk assets go up, Bitcoin goes up less. No value in that!”

On the other hand, it has been reported that financial advisors suggested that Bitcoin was a good alternative investment to consider adding to one’s portfolio. This raises doubt that the relationships between crypto and traditional assets claimed by Peter Schiff are observed in different scenarios. 

Crypto returns outpace other risk assets during positive periods

During January 2020, Bitcoin and Ether (ETH) saw gains of 26.2% and 32.9%, respectively. At the same time, in such a positive period for the top cryptocurrencies, traditional assets such as the S&P 500 gained (1.96%) and the Nasdaq composite remained approximately the same (- 0.16%).

Cumulative returns for BTC, ETH, Oil, Gold, S&P 500, and Nasdaq during January 2020.

Looking at the correlations between the 4 assets in January, we find the opposite relationship to the one mentioned by Peter Schiff. Bitcoin and Ether are negatively correlated with both the Nasdaq and the S&P 500. 

Cryptocurrencies show negative correlation to stock indexes during positive periods 

Bitcoin is correlated at -24.4% with the Nasdaq composite during this period, while Ether has a smaller negative correlation at -16.2%.

Regarding the S&P 500, Bitcoin is negatively correlated at -19.7%, while Ether has a smaller negative correlation of 7.9%. 

This is the opposite of Schiff’s comments, as, during a positive scenario, Bitcoin goes up more than other risk assets, as seen from the returns obtained during January. Moreover, Bitcoin and Ether have a correlation with equities in the opposite direction (negative), which is contrary to Schiff’s comments. 

A correlation of 100% means that either Bitcoin or Ether and each traditional asset move completely in the same direction, while -100% correlation means they are inversely related. A correlation of 0% means that the variables are not related in any way.

In January both Bitcoin and Ether returns showed a positive correlation with gold at 24.1% and 22% respectively. The relationship between Bitcoin, Ether, and WTI oil returns was also positive and in higher magnitude – 33.6% in the case of Bitcoin and 34.7% for Ether. This is the opposite of Schiff's comments as gold and Bitcoin are positively correlated instead of negatively. 

Inverse relationships observed during negative periods for Bitcoin

In February Bitcoin price dropped about 7.5%, while Ether gained more than 23%. During this negative period for Bitcoin, its relationships with stock indexes were the opposite from the one observed during January (a positive period in price). Bitcoin was correlated at 5.85% with the Nasdaq and at 21.3% with the S&P 500.

In February, Ether gained in price and its returns were positively correlated with the Nasdaq (20.2%) and the S&P 500 (31.1%) 

Cumulative returns for BTC, ETH, Oil, Gold, S&P 500, and Nasdaq during February 2020.

Throughout February, gold was still correlated at 21.1% with Bitcoin, while Ether was correlated at 17.2%. January’s relationship with oil was also quite similar, with correlations at 32.3% and 36% for Bitcoin and Ether, respectively.

Are correlation trends broken by recent market volatility?

Since March, both Bitcoin and Ether cumulative returns have performed worse than equities markets. This trend follows the argument made by Schiff that “when risk assets go down, Bitcoin goes down more”.

However, Bitcoin and Ether returns have shown a high positive correlation in the first 12 days of March, with gold at over 70%, and between 66% and 69.5% with the stock indexes. The lowest correlation was with oil – between 32% and 34%, which has also seen a great decrease in price. This challenges Bitcoin and Ether's role as safe-haven assets during severe market conditions.

Nevertheless, if we look at year-to-date returns, even after bloody-Thursday, Bitcoin still holds a better return than other risk assets like the S&P 500 or oil, even though each are negative in this period. 

Year-to-Date returns for BTC, Gold, Oil, S&P 500, and US Dollar. Source: Skew.com

Looking forward, investors are now aware that under historical-negative market conditions, gold may still be the real safe-haven asset. However, Bitcoin may be an alternative during these periods, while in other periods it appears to offer the best option for investors. 

Data for the S&P 500, Nasdaq Composite, Gold and Crude Oil  from https://finance.yahoo.com.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.