Is Crypto a Safe-Haven? It is if You're Very Wealthy
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For a long time, crypto enthusiasts around the world have touted Bitcoin and other cryptocurrencies as a safe haven for investors in times of economic trouble.
The problem with that assertion, of course, is that Bitcoin (the granddaddy of cryptocurrencies) was created in part as a reaction to the 2008 global financial crisis. Since then, cryptocurrencies haven't had to ride out any form of protracted economic trouble. In other words, the safe heaven designation was theoretical at best.
Then came the coronavirus (COVID-19) pandemic.
The spreading disease and the economic fallout it is creating sent shockwaves through economic markets all around the globe. It is, in effect, a trial by fire for Bitcoin and other cryptocurrencies, which are now going through an economic contraction that's even more severe than the one that prompted their creation in the first place. So, the question now is: how's the market responding?
The answer, as you might expect, is complex. Here's a look at what's been going on and what conclusions we can draw from the data.
An Initial Crash
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For crypto investors, the early days of the global pandemic weren't very kind to their wallets. According to data provided by the major cryptocurrency exchanges
, what happened in early March was nothing short of a financial debacle. In a span of two days, Bitcoin lost around 50% of its value
The other major cryptocurrencies posted similar losses. Over the same span, the major stock markets posted losses that were around 10%. Now, a single data point doesn't establish a pattern, but it's clear which investors took the biggest beating as the coronavirus effect began to batter markets.
A Sharp Recovery
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At the time of this writing, however, the situation appears to have changed. Right now, Bitcoin and the other major cryptocurrencies have more than recovered from their big selloff, trading at levels that the market hadn't seen since mid-February.
By contrast, the stock market has only managed to recover about 30% of its losses
over the same span. That kind of booming recovery, some argue, is the exact reason why cryptocurrencies are so promising as safe-haven assets.
The very volatility that makes them difficult for investors to manage also allows them to respond more quickly to changing economic conditions – both positive and negative.
So, What Exactly is Happening?
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It would be tempting to look at the raw market data and conclude that the better bet (so far) for investors to protect their savings in this particular crisis has been cryptocurrencies.
The trouble is, a closer look at what's going on reveals that not all crypto investors are created equal. An analysis of the crypto market activity during the selloff and the recovery indicates that it was small investors who rushed to cash in their crypto-assets as the pandemic took hold.
It is those small-time investors who likely decided that they were going to need to stockpile some cash to cover their living expenses as employers everywhere shut their doors.
So, as the market was tanking, big buyers moved in to buy low from nervous small-timers who feared for the economic damage to come. In other words, the rich got richer as the crypto prices recovered – and the gains of the recovery didn't end up in the same pockets that the losses came from.
The Bottom Line
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Now, some analysts will be quick to point out that big investors always tend to benefit in situations like the one that seems to have just happened in the crypto markets.
That means big stock investors don't have the same market-swaying power that big crypto investors do. In this case, that would seem to suggest that the vast majority of small crypto investors have lost a huge amount of their investment value in the past two months, while the big guys have cleaned up.
While that's very good news for a select few very wealthy individuals, it's downright depressing for everyone else. And it doesn't sound like much of a safe haven asset for the average investor after all, does it?
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