Bond markets have signaled an ominous warning that recession could be on the way but, so far, bitcoin has only responded with losses, indicating it may not be the best haven from global economic uncertainties.
The spread of key interest rates on differing government bond maturities in the US and the UK have inverted, as yields on longer-term debt such as 30- and 10-year bonds fall below the yields of five- and two-year debt.
Bond yields fall as prices rise, thus, such yield activity indicates that investors are buying more longer-term bonds as fears rise over short- and medium-term economic stability.
Indeed, bond-yield inversions have, in the past, heralded periods of economic downturn and recession. The last seven recessions, dating back to 1969, saw bond-yield inversions signaling them.
Market Reaction
Stocks reacted to the news with losses. On Wednesday, equity indices in the UK and Europe were between 1.5% and 2% lower in mid-afternoon trade, and US indices opened around 1.5% lower. Gold, one of the traditional hedges against periods of global economic uncertainty and geopolitical risk events, was 0.8% higher at $1,526 on the Comex exchange.
But bitcoin – which has often been described as “digital gold” and has also been touted as a potential hedge – is down around 5% to $10,591. Other cryptocurrencies were mostly lower.
Bitcoin as a Risk Hedge
Although Wednesday’s move suggested the price of bitcoin did not correlate well with risk aversion, the cryptocurrency rallied strongly during the period of heightened tension between the US and China at the beginning of this month when Beijing devalued the renminbi and the US accused it of currency manipulation.
So what is bitcoin’s position in a crisis? Can it display similar hedging qualities possessed by gold, or do investors sell in times of heightened risk?
Grayscale, the bitcoin fund manager, published a paper earlier this month that said bitcoin was displaying an ever-more reliable store of value and spending characteristics similar to cash. Matthew Beck, the report’s author, said:
With continued adoption, Bitcoin represents a transparent, immutable, and global form of liquidity that can provide both wealth preservation and growth opportunities.
Indeed, Beck used the US-China trade tensions as an example of bitcoin’s attractiveness. Since President Trump first announced tariff hikes in May, bitcoin generated a cumulative return of 104.8% through to August 7, Beck said. He concluded:
The challenges faced by politicians and policymakers will be difficult to manage given the complexity of our global financial system. Bitcoin could be a useful tool in helping investors insulate their portfolios from any failure to manage these problems effectively.
Nigel Green at financial advisory deVere Group agreed:
Bitcoin is currently realising its reputation as a form of digital gold. Up to now, gold has been known as the ultimate safe-haven asset, but bitcoin – which shares its key characteristics of being a store of value and scarcity – could potentially dethrone gold in the future as the world becomes increasingly digitalised.
Risk Hedge Challenged?
As bitcoin performed well during the risks associated with the US-China trade war, it doesn’t necessarily follow that it should do the same during periods of economic uncertainty.
As global markets have witnessed in the past, during downturns and recessions any drop in the total pool of global investment can result in losses across asset classes. And during downturns, institutional investors adjust their portfolios to favor ultra-safe government bond assets.
Bitcoin has fallen for five out of the last six days, so it is presumptuous to suggest Wednesday’s fall alone challenges the notion that it is a good hedge against global risks. We wait and see.
