Bitcoin Being a Safe Haven: New Evidence from the COVID-19 Pandemic

Bitcoin’s status as a “safe-haven currency” is well-known in the cryptocurrency world. Before the outbreak of COVID-19, there was no credible evidence to support or deny this notion in the global financial markets. Gold has long been a safe-haven asset, and these ties confirm that. Even when the larger crypto index is taken into consideration, gold emerges as the clear winner in this piece, proving the Bitcoin safe-haven fantasy to be untested and unsustainable (CRIX).

Bitcoin serves as “Digital Gold”

Historically, the development of Bitcoin is intertwined with the notions of “digital gold” and “isolation from established financial institutions.” For decades, gold has been utilized as a safe-haven asset, but this position might lead to Bitcoin being used as well or instead of gold. It’s a safe-haven asset that may be utilized if other assets fail. Markowitz’s portfolio design logic generally results in low or even negative correlations with the other assets if other assets are distressed, which is a significant distinction from being a powerful diversifier. Investments in safe-haven assets are less correlated with other assets during times of uncertainty than they are in tranquil periods.

Emphasis on financial and Scientific communities

There is a lot of emphasis on financial and scientific communities on the position of Bitcoin as a safe-haven asset. Therefore, the methodology of financial markets’ safe-haven concept was unable to thoroughly examine or validate its practicality. Aside from Mt.Gox and the shadowy networks, Bitcoin was virtually untouched throughout the global financial crisis. For the very first time in 2016, Bitcoin’s trade volume crossed $100 million. Logarithmic returns from 1946 may be used to discover significant historical events with poor returns of more than 5 standard deviations from the average. The mean and standard deviation of datasets between January 1, 1946, and April 17, 2020, are used to demean and normalize the series. The right panel depicts several events that occurred over two trading years and exceeded 3 to 5 deviations (500 trading days). Five-SD events have occurred just a few times since 1987. That is, between the period of 2013 to 2020, when Bitcoin became widely accepted and used. When the SARS-CoV-2 virus pandemic (coronavirus illness 2019) swept throughout the world in March 2020, financial markets lost a lot of money.

Bitcoin and other Assets

Economic uncertainty is measured by the CBOE Volatility Index (VIX), which compares Bitcoin’s interconnectivity to that of the S&P 500. For this investigation, Yahoo Finance data and the Bitcoin price are only valid until September 16, 2014. The permit expires on April 17, 2020, 2020. Close logarithmic returns illustrate weekend fluctuations in Bitcoin trading despite it being available for trading 24/7, seven days a week (rather than open-close). A maximum of 1,455 days was spent collecting data.

Consider the connection between Bitcoin and S&P 500 and the VIX since the safe-haven attribute is equal to diversification, meaning minimal correlation with other assets during crucial events. Inside the wealth distribution’s baseline, critical events are rare negative occurrences, i.e. happenings in the (very) low deciles. This may be done using quantile correlation. A total of one thousand bootstrapped datasets are used in the calculation of the quantile correlation coefficient to ensure statistical correctness (The time index is re-sampled using a replacement).

Correlation between Standard and Poor’s 500

A correlation exists between the S&P 500 (left) and the VIX (right). An example of an S&P 500 or VIX conditionally quantile may be seen here. With correlates around zero and 95% confidence intervals containing zero correlation, we show that BTC is a decent diversifier when the S&P 500 is quiet and positive. At the lowest computed quantile of 0.01, the correlation climbs to 0.13%. Using lower S&P 500 quantiles and a strong correlation, it is likely that BTC will collapse in pace with the stock market during a crisis. As a result, the poorest quantiles are substantially greater than during calmer periods. High VIX quantiles should be analyzed since uncertainty increases with increasing VIX.  A safe-haven asset must have low or positive correlations across all quantiles. Even while the correlation is low, it’s not a strong signal of safe-haven when the S&P 500 drops in periods of severe uncertainty.