How Bitcoin and Crypto is Proving to Be a Hedge Against Global Risks
While U.S. stocks recently plummeted in the face of U.S.-China trade war, safe haven assets such as gold and government bonds retained their value. That wasn’t so out of the ordinary, except for the fact that a new asset class has joined that list.
To the surprise of some, that asset class happens to be none other than the leading digital cryptocurrency, bitcoin.
While stocks took a 3 percent dive, bitcoin as the world’s biggest cryptocurrency jumped by 7 percent in value. This remained in line with the impressive year that the cryptocurrency is having for its holders, where it has gained value for the most part in the face of global risks that have caused a big dent in the value of conventional securities.
For those watching the markets, this achieved two objectives.
Firstly, it strengthened the claim about digital currencies being free of the influence of global financial crises. Secondly, it went on to enhance bitcoin’s status as a viable alternative asset.
The effects are significant to the point where it is being assessed that Bitcoin has finally broken free of its correlation to dollar.
Bitcoin Could Be the Answer for Those Seeking Hedge Against Global Risks
In an appearance on CNBC, investment firm Fundstrat’s CEO Tom Lee mentioned that Bitcoin has established itself as a hedge against global risks.
According to Lee, who is considered as a long time Bitcoin supporter, Bitcoin has finally shown that it could break free of U.S. dollar’s value.
The financial expert went on to establish that previously, Bitcoin’s value had been correlated to dollar. “Weak dollar has been good for bitcoin.” He mentioned before he clarified that 2019 has brought about a change in this correlation.
Lee pointed out that in 2019, Bitcoin started to break free from this constraint of dollar value. When the fiat currency’s value stabilized and started to improve against others global currencies, Bitcoin’s value sustained instead of taking a dive for the worse.
The financial expert mentioned that this distinction marked the start of Bitcoin’s real progression. Instead of being influenced by dollar value or equity markets, the digital currency established itself as a completely separate asset class that is free from being influenced by risk markets.
Lee went on to mention that Bitcoin’s value is now “positively correlated to gold.” This particular comparison also alludes to how Bitcoin is now free of being dependent on other markets.
Those who support this view are of the belief that the leading digital asset, Bitcoin is now in a positon to offer alternative asset options in a never seen before manner.
Bitcoin Is Now Being Mentioned Aside Safe Haven Investments, Even If It’s Not There Yet
Alternative assets that are not tied to the value of dollar or other global currencies have been able to hold their own in downward trends of the market, such as the one being witnessed now.
These investments, which are called safe haven investments due to this quality, typically include physical assets such as gold and bonds. The consideration to include Bitcoin among safe haven assets is one of those rare instances where a non-physical asset is being regarded as a safe haven investment. Non-physical investments such as stock or equity do not typically qualify to be safe haven assets.
Unlike equity or stocks, safe haven assets are not dependent on the value of risk assets or related factors such as fiat currency or trade regulations. Instead, they retain the original investment in the face of volatile markets. In certain cases, they actually increase the value of the original investment.
This is exactly what has happened this time around. As the stock market has plummeted by 3 percent, the value of gold and related securities such as futures has risen by 2 percent.
This could all be attributed to a number of factors. As mentioned above, the U.S.-China trade war is one of the major reasons behind this development.
The U.S. government’s decision to impose 10 percent tariffs on $300 billion worth of Chinese products has caused uncertainty in related markets. What propelled this development was Chinese yuan’s value to fall to its lowest level.
As noted by various experts in trading, business and financial industries, China is known to control the value of its currency. But it let it fall over the traded value of 7 CNY per USD. To be precise, the yuan traded at the value of 7.04, which is something that hasn’t happened since 2008, at the time of the Great Recession.
As if the volatility caused by this shift in the market was not enough, the value of safe haven assets was pushed further by the Fed’s decision to cut interest rates on July 31. Once again, this was a development that had not taken place in over a decade since the Great Recession.
As a result, those who had been holding to their gold bullions and their futures decided to keep their investment intact or actually double down on it, and the movement in the market caused gold’s value to increase in a way that has not been noticed in six years.
All of these historic changes in the market were enough to bring safe haven investments on top of the list for professional investors. But this time, another alternative asset in the form of Bitcoin also benefited from it.
That is why, Bitcoin’s movement in its value is being attributed to gold instead of fiat. But when you look at it closely, Bitcoin’s value is not correlated to any of these assets.
Bitcoin is Moving at Its Own Pace with Its Own Model
While Lee has negated Bitcoin’s correlation to the U.S. dollar, his comparison of Bitcoin being correlated to gold could also be termed more symbolic than an actual definition of how Bitcoin’s price is decided.
To elaborate more on this: It is common knowledge that Bitcoin is a completely different asset class that is unlike any other investment.
As compared to fiat currencies, it is not a physical asset neither is it controlled by a central authority. When compared to stocks, it is clear that it is no way the representation of equity for a company. When you compare it to alternative investments such as gold or bonds, it is also evident that it cannot be sourced naturally or issued physically.
Instead, it is simply a decentralized digital currency that cannot be controlled by anyone. Its value is not regulated by interest rates; not dependent on the performance of a fiat currency; and not correlated to any movements in the related markets.
Bitcoin’s value and its movement in the market is based upon speculation that could not be controlled or predicted by anyone. This could be referenced to the way the cryptocurrency market rose and fell after the last quarter of 2017.
That is why, as opposed to Lee’s bullish take on Bitcoin being correlated to gold, other experts are terming it as Bitcoin’s simple and inherent quality to obtain outsize gains.
According to these experts, Bitcoin is not as dependent on gold as it is an investment that comes with a promise of sizeable profits due to its own investment model.
This also pushes Bitcoin’s possible status as a safe haven investment out of the way, since the trend of Bitcoin’s gains being correlated to gold or other assets is nothing but short lived. For now, gold is moving up in its price just as Bitcoin is doing on its own pace. But the correlation or similarity ends at that movement. Neither Bitcoin nor gold is dependent upon the value of the other.
For instance, if the market stabilizes soon and gold’s value goes back to its normal price, it is not guaranteed that Bitcoin’s value will fall as well. Similarly, if Bitcoin’s value suddenly increases by an unprecedented margin, it is not necessary that gold would benefit from those gains at all. Both assets are their different markets that operate on their own pricing models. Gold’s price is related to a number of factors that are described above; whereas, Bitcoin’s value is based solely upon market speculation.
This means that while investments in Bitcoin are prone to provide large profits that could hardly be seen in other assets, they are still not strictly safe haven investments. In the event of a fluctuation in the digital currency market, Bitcoin’s prices may take a hit even if said losses are nowhere as compared to the large gains that could come with holding a digital asset.
On the other hand, gold’s prices would more than likely retain their original value, but the compromise would come in the form of minuscule gains or upward price changes.
Bitcoin is a Great Alternative Investment That Is Showing Upwards Pricing, But It Is Not Related to Gold
With that being said, the speculation that is deeply important to Bitcoin’s value could be influenced by the current market changes that have driven up gold’s value historically.
For instance, the changes in stock market, the movement of U.S. dollar, and the cut in interest rates that would push investors towards alternative investments could all work towards enhancing Bitcoin’s pricing.
Aside from that, Bitcoin does hold the power for investors to use it as a hedge on global risks. Since it remains free of a central authority and could provide price movements that come with large gains — it is safe to say that it might attract conventional investors who had not given the possibility of investing into Bitcoin a serious thought before this.
Awareness of bitcoin, cryptocurrencies and their use cases spread as more pay attention to value destruction in traditional paradigms and value preservation in innovative paradigms.
The ZB Group realizes that there is continuous volatility taking place within the current world from technology to finance. The ZB group pays attention to current trends and studies the growth of digital assets, fintech, and other phenomena and trends that make up the intersection of innovation and finance in this digital age.
The ZB Group aims to solve problems with innovative solutions that help to meet and exceed consumer needs.
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About ZB Group
ZB Group was founded in 2012 with the goal of providing leadership to the blockchain development space and today manages a network that includes digital assets exchanges, wallets, capital ventures, research institutes, and media. The Group’s flagship platform is ZB.com, the industry leading digital asset exchange. The platform launched in early 2013 and boasts one of the world’s largest trading communities.
ZB Group also includes ZBG the innovative crypto trading platform, and BW.com, the world’s first mining-pool based exchange. Other holdings include wallet leader BitBank, as well as exchange brands ZBM, ZBX and Korea’s Bithi.
Industry intelligence and standards are headed by the recently launched ZB Nexus who embody the core values of ZB Group and open source their reports and analysis for the public.
