2020 got many firsts, but one of them was arguably the first big and fast market pull-down during Bitcoin’s existence. So how did Bitcoin perform? Researchers have looked at the data and are not discouraged. Bitcoin fell in tandem with many other assets. This does not bode well for Bitcoin as a safe haven asset, at least not for S&P 500 investors. Of course, this does not derail the Bitcoin investment case, but it does mean that you should not necessarily expect it to strengthen your portfolio in times of market stress. However, there are also reasons to think that the decline of the 2020 market has some unique aspects to it.
The Covid Drawdown
The market downturn in March 2020 was relatively unique in some respects. The correlation between assets was very high for a period of weeks. Now, it is common for assets to move together in a bear market, but the price action we saw in March 2020 was extreme. For example, gold is generally considered a safe haven asset, yet it saw a decline in the market decline associated with Covid. So if gold was not performing as a safe haven at the time, should we have expected Bitcoin to do so?
One reason we might not expect Bitcoin to perform as a safe haven asset is if it is used for speculation. If that is the case, then it is not surprising that speculators would sell at times of market stress. On the other hand, if it were owned by long-term investors, then pricing could be more stable when the market is forced.
Research suggests that, in 2019 at least, Bitcoin was held primarily for speculative purposes. Bitcoin is often owned by frequent traders who generally hold high-risk portfolios according to this research. As such, Bitcoin is less likely to perform as a safe haven asset given its investor base.
A key challenge with Bitcoin is that it is perhaps too early to form a real assessment of the characteristics of its portfolio. Even with long-standing assets, they can perform differently through different market cycles and you often have to look across multiple market cycles to make informed judgments.
With Bitcoin we can’t, of course, do that, because it hasn’t been around long enough. That said, an analysis of Bitcoin trading patterns before 2020 suggested high volatility and correlation with stocks in lower markets.
However, as Bitcoin evolves over time so can its investor base and portfolio characteristics as well. While Bitcoin may have the potential to replace gold over time, for the time being it is not trading as a safe haven asset.