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Are cryptocurrencies really a new safe haven?

Are cryptocurrencies really a new safe haven?

Threats of a conflict between two nuclear-armed powers have understandably pushed some investors out of risk assets and into safe havens over the past week. But as gold and the yen ticked up slightly, bitcoin surged by 50%.

Bitcoin surged past the $4,000 mark for the first time over the weekend as US president Donald Trump and North Korea’s leader Kim Jong-un continued their war of words. The digital ‘cryptocurrency’ has increasingly been perceived as a safe haven due to its lack of correlation with most other asset classes.

Whether its recent rise is down to safe haven buying, however, is not clear.

‘To begin with, there’s just a natural hype cycle with cryptocurrencies. There’s a feedback mechanism. Whenever it hits a new high, there’s a lot of press around it, which creates more interest and more demand,’ said David Moskowitz, CEO of Attores, a blockchain company.

‘If you take a look at Google Trends, you’ll always see “bitcoin” trending upwards around the peak price. So there’s a natural loop between media hype and investor sentiment… whether or not that has to do with external political factors, to me that’s never clear.’

In early August, Bitcoin underwent a major evolutionary step. The currency was divided into two, with a new ‘bitcoin cash’ created by a group of users who wanted to increase the speed with which the cryptocurrency can be traded, allowing for it to be scaled.

‘For me it’s more that a solution for bitcoin scaling has come about and therefore, the community in general is much more positive on the future of bitcoin,’ said Moskowitz.’ So that would create some more buying pressure and more enthusiasm out of markets like Japan and Korea, which is creating more demand for bitcoin.’

Kay Van-Petersen, global macro strategist at Saxo Bank, agreed that bitcoin’s jump is more down to the creation of bitcoin cash than it is to a desire for safety. He said that for bitcoin to be considered a safe haven, investors would need to understand how it performs during a crisis, and to be certain that they could always cash out. A large part of the attraction of gold is its fungibility.

‘Safe haven assets would be something you can have a big chunk of your assets in and there would be no concerns about getting your money out. Cryptocurrencies are too young a market for that right now,’ Van-Petersen said.

‘You could argue that the lack of correlation to other assets and diversification could help cryptocurrencies gain that status but you have to make sure that granny doesn’t put 95% of her pension savings into them.’

That does not mean that there is no place in a portfolio for them. Dave Chapman, managing director of digital assets trading firm Octagon Strategy, said that bitcoin can be used for diversification during times of political uncertainty.

Institutions, including private banks, have started to consider cryptocurrencies as investments, and Octagon is receiving a growing number of block trades from institutional investor, Chapman said.

‘With so much political uncertainty, there are definitely people who would consider bitcoin as another means to diversify their portfolio,’ he said in an interview. ‘We had Brexit and Trump last year. Given the events that have happened recently, it’s not crazy for people to hold digital currencies or assets.’

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