Cryptocurrencies as new safe haven assets

The market retains high volatility and changes moods often during geopolitical, military, and trade risks. At such a time, the main driver of the market is investors’ fear of the unknown, which makes them look closely at other assets.

Decline in stock indices

Due to common fears and pessimism, cryptocurrencies have received considerable support since May. The reason for this was the general exacerbation of risks due to the escalation of the US – China trade tension. This is confirmed by the virtually instantaneous growth of the main cryptocurrency of Bitcoin (BTC). Bitcoin growth coincided with the collapse of stock indices, including the stock index DOW 30 and a significant increase in the VIX index. The index reflects market volatility and also indicates the nervousness of the market, also called the “fear index”.

BTC/USD chart in the Japanese candlesticks – the red line is the DOW 30 index, the blue line is the VIX index.

 

The DOW 30 and VIX indices have a high degree of inverse correlation, so you can follow the same index. Considering the above chart, both indices are leading indicators for this currency pair and the cryptocurrency market in general. On higher timeframes, these indices form reversal extremes, which can be regarded as a very positive signal for the cryptocurrency market and negative for stock markets.

Geopolitical factor

In addition to the general risks on which cryptocurrencies have received support, geopolitical risks are worth noting. So, cryptocurrencies, including Bitcoin, are decentralized currencies. They are not controlled by the banks. Let us recall various kinds of sanctions and prohibitions by the United States regarding Venezuela, Iran and China. They were a factor in increasing risks. It can be safely noted that cryptocurrencies are a kind of exchange currency in the turnover of authorized countries.

So, for example, let us recall the recent case of unloading Iranian oil in the ports of China. Iranian oil was completely under sanctions. Bitcoin could act as the currency of calculation, which is very convenient in the existing conditions.

Separately, it is worth mentioning the fact that the majority of digital exchanges where cryptocurrencies are traded, are based on or belonging to China or the Asian region. It may also indicate an increase in demand from Asian investors and business, which remains under the pressure from trade duties.

Despite all attempts by the cryptocurrency population and an increase in institutional support, only partial recognition of the crypt market by the world central banks was achieved. The popularity of such currencies, their security and the level of everyday life remains very low. In addition, it is worth noting their high volatility.

But, despite the obvious disadvantages, the main advantage of cryptocurrency is its secrecy. Under uncertainty, it acts as a safe haven asset. Although, due to its nature, the crypt retains a high volatility, which is not inherent in classic safe assets.

Anton Hanzenko