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Bitcoin can provide protection, but it’s complicated

Bitcoin can provide protection, but it's complicated

The discussion about what exactly Bitcoin (BTC) is has been going on for years, and it’s not just about whether it’s a digital version of gold or a payment protocol. Opinions also differ on the financial side of crypto. Luckily, you can measure this objectively as there has been an open market for BTC for years. Scientists have researched it and are now finally taking the step.

Bitcoin correlated with risky assets

In late 2022, researchers from China’s Southeast University and East China Normal University examined the exact link between Bitcoin and traditional financial assets.

This shows that the situation for Bitcoin is a bit more complicated than many people probably thought. It’s much more volatile than most other traditional assets, meaning the longer-term correlation is much stronger than the short-term.

This is especially important if you are actively trading the coin. Because this can cause the Bitcoin price to move differently than you would expect based on the price movements of other assets.

In any case, there is generally a positive correlation between risky assets like technology stocks. This suggests that it’s certainly not some sort of “safe haven” for investors in riskier assets like many stocks in the short term.

Additionally, during violent events, the correlation between Bitcoin and other risky assets increases. We saw that in March 2020, for example.

However, the positive correlation with these other assets means that the coin’s value can increase if the dollar falls in value. This is exactly what happened in 2020. The dollar then fell around 13% against the major currencies, but the US stock market hit a new all-time high.

Is Bitcoin a Safe Haven?

According to the researchers, bitcoin is a less good way to limit your risk than gold — at least for most G7 stocks. Also for stock markets of countries like Thailand, BTC would not be the best choice, although gold does not prove to be suitable in this case either. The dollar would historically be much safer for Thai investors.

The United States is also in the G7, but Bitcoin would be a safe haven for the US stock market. The same can be said about the utility of cryptocurrency when investing in Chinese stocks. All in all, it just depends on how your portfolio is structured. The bottom line is that bitcoin is more of a risky than a safe asset.

Nevertheless, it is worth comparing studies with one another. For example, the correlation with gold has also increased historically, and some analysts expect bitcoin will continue to outperform traditional bitcoins hedges.

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