Should investors consider Bitcoin as a safe haven from turbulent financial markets? In their June 2018 paper entitled “Bitcoin as a Safe Haven: Is It Even Worth Considering?”, Lee Smales and Dirk Baur assess the potential for Bitcoin as a safe haven, focusing on considerations beyond its low return correlations with other assets during times of market stress. Their comparison set of assets consists of gold (GLD) and bonds (10-year U.S. Treasury futures) as traditional safe havens, a proxy for the U.S. stock index (SPY) and mature (Apple) and immature (Twitter) individual stocks. They match samples by removing Bitcoin data for weekends and holidays. Using daily returns for Bitcoin and the comparison set of assets during August 2011 through May 2018, they find that:
- Bitcoin has the highest average daily return (0.32%), but also the highest standard deviation of returns (3.47%) and the deepest daily drawdown (-66.4%).
- The largest daily drawdown for SPY (GLD) is -4.18% (-10.2%), and Bitcoin has declined by more than that on 197 (63) days or 11% (3.5%) of all days in the sample.
- Bitcoin bid-ask spread declines over time but is still the widest, and its spread widens significantly during high volatility.
- The time taken to confirm a Bitcoin transaction can be longer than 78 minutes and is frequently close to 20 minutes.
- Transaction fees for Bitcoin can be as high as $60, with average $28. Fees are highest when volatility is highest.
- Bitcoins are kept in a digital wallet not insured by the government.
- Bitcoin prices are easily manipulated.
In summary, until the market matures, it is not worth considering Bitcoin as a safe haven.
Cautions regarding findings include:
- By the time Bitcoin (or some other new asset) proves itself a safe haven as specified, the market may be extinguishing its efficacy for that role.
- The paper takes the perspective of a U.S. investor. Investors in countries with unstable currencies may have a different perspective about the riskiness of Bitcoin.
