Cryptocurrency enthusiasts have argued that bitcoin, an asset defined as highly volatile, should be considered a safe haven. Shutterstock

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Whether it is for financial, geopolitical or medical reasons, the symptoms financial markets experience in times of crisis remain much of the same. As stocks plummet and interest rates decline, governments roll out fiscal packages to stimulate recovery, and debt mounts.

In these times of uncertainty, investors turn to safe haven assets, like gold, which promise to retain their value while the rest of the world is quarantined. If rare-earth metals are considered secure investments, it is because they boast a series of unique characteristics. Unlike money, gold and silver are physical commodities, limited in availability and impossible to print. Their value is not impacted by governmental decisions, such as interest-rate changes and monetary policies, and they are not correlated with the general economy. In times of market turmoil, these assets separate themselves from the general drop to maintain and sometimes increase in value.

Interestingly, cryptocurrency enthusiasts have argued that bitcoin, an asset defined as highly volatile, should be considered a safe haven. To promote their argument, they gave the world's most famous cryptocurrency a new moniker: "the digital gold."

But what stands behind this surprising argument? Are cryptocurrencies truly safe? Do they have the potential to become this digital gold? Part of the answer lies in the creation of cryptocurrencies.

Gold and Digital Gold: A Shared DNA

Between 2008 and 2009, as the world's economy sunk in the deep waters of the global financial crisis, bitcoin was created as a transparent and controlled currency, and held the promise of transforming a currently broken monetary system. It is therefore no surprise to find that bitcoin was designed to mirror the attributes that built the value, longevity and trust enjoyed by rare-earth metals. To mimic the rarity of gold, bitcoin relies on hard-cording, a software practice of embedding data directly into the source of its program. Not only did this allow to create digitally controlled scarcity, but it also made bitcoin an asset with a finite number. While it is impossible to guess how much gold still lies under the earth or deep beneath the oceans, there will never be more than 21 million bitcoins.

Aside from the characteristics they share, rare-earth metals and digital currencies also ride in tandem on financial markets. During the past year, the two assets rose and fell simultaneously. For example, as fears over a potential recession started to haunt investors in early 2019, bitcoin and gold both peaked by mid-year, before falling simultaneously and going up again by the fourth quarter.

Furthermore, the two assets have proven to be detached and uncorrelated to general market performance. If the resilience of gold has been proven for decades, if not centuries, bitcoin's performance since 2012 has matched its rare-metal peer. Data from Coin Metrics demonstrated that when compared with the S&P 500, bitcoin's correlation was close to zero, proving that the cryptocurrency was not affected by traditional market performance and responded to another set of rules and disruptions.

Corrolation S&P chart
The correlation between bitcoin and the S&P 500 index is close to 0. Coin Metrics

The recent tumult between the United States and Iran clearly exemplified this trend. When General Qassem Soleimani was killed, markets were disrupted and stocks experienced a steady fall. The price of bitcoin, however, surged to $7,300.

The Coronavirus Effect

Today, the devastating effects of the coronavirus has invigorated digital currencies' main detractors. On March 12, the value of bitcoins dropped from nearly $8,000 to $4,000, enough for critics to claim that true safe havens would have held up, but bitcoin didn't.

But how exactly did safe havens react to the coronavirus crash?

In the case of gold, it reacted in similar fashion to bitcoin, dropping from an all-time high of about $1,700 to $1,450. The market's downturn also erased all gains enjoyed by silver since 2008, sent platinum back to its 2004 levels and cut the value of palladium by half, all in a few short days.

Value of Silver
The value of silver declined by more than 35 percent in March. TradingView
Platinum chart
The value of platinum dropped by more than 45 percent in March. TradingView

Due to its scale, magnitude and impact across the board, the coronavirus crash is simply not enough to reject the claim that cryptocurrencies are a secured asset. While the history of bitcoin shows various downturns, each of these was followed by a stabilization and a steady upward grind. From January to June 2019, for example, its value went from roughly $3,500 to $11,000.

Furthermore, the reaction of cryptocurrencies to the sudden crash has been more diversified than it seems. It is worth noting, for example, that on March 14, Circle's USD Coin, a stablecoin backed by the U.S. dollar, reached a new all-time high of $568 million amid fears of a global lockdown.

Considering that rare-earth metals have been trading for centuries while digital currencies have existed only for a decade, the reaction of cryptos to the coronavirus crash shows clear signs of optimism. How can we dismiss the value of cryptocurrencies as safe havens if safe havens themselves experienced a similar, or even greater crash?

The Promise of a Bright Future

Despite current extraordinary circumstances, let us not forget that cryptocurrencies are increasingly accepted by society. In the space of 10 years, they went from being associated with 'illegal trade' to considered by some as a safe haven. Today, they are traded on the Chicago Mercantile Exchange, accepted as means of payment on various e-commerce platforms and have caused regulatory changes in various international countries, including China and Mexico. If we combine this acceptance with their unique characteristics, such as their programmed scarcity and their uncorrelation to traditional markets, we should not be surprised to find out that, soon enough, they might indeed become this digital gold.

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