Why is Bitcoin considered a safe-haven asset in the US market?

In the US market, Coinbase, which provides cryptocurrency trading, will be listed on April 14. Coinbase achieved revenue of $1.8 billion in the first quarter of 2021, exceeding the $1.3 billion for the whole of last year. The upper limit of profit in the first quarter may reach $800 million. There are 56 million registered users, exceeding the 43 million in the previous quarter. With such a growth rate, the scale of revenue and profit far exceeds that of existing stock exchanges. Coinbase's main trading product is Bitcoin, which shows how popular Bitcoin is in the market.

In addition to the Coinbase listing factor, some other market behaviors also show the market's high attention to Bitcoin. Some well-known insurance companies such as Mass Mutual, New York Insurance Company, Liberty Mutual and Starr have begun to jointly develop insurance products based on Bitcoin. Famous American investment banks have also begun to provide Bitcoin-related services. The most radical of them is Morgan Stanley. Morgan Stanley is investing heavily in Bitcoin's market infrastructure and also providing Bitcoin-related services to its wealth clients. In addition, as of today, there have been 9 applications for the establishment of Bitcoin-based ETFs in the US market submitted to the US SEC. These and other trends in the market show that the US market is increasingly paying attention to the value of Bitcoin.

Among the various values ​​of Bitcoin in the market, one of them is to regard it as a safe-haven asset. And this view has its logic.

The rapid growth of Bitcoin prices can be said to have started in March 2020. The monetary policy implemented by the Federal Reserve to rescue the crisis caused by the epidemic has led to a large increase in the issuance of US dollars. The increase in the issuance of US dollars inevitably leads to the depreciation of the US dollar and the inflated value of all assets priced in US dollars. These assets include real estate and stocks. For institutional investors, they must consider how to deal with the actual depreciation of their assets brought about by such market developments. They began to study alternative assets that can hedge such market risks. Among these available assets, the safe-haven value of Bitcoin has gradually been recognized by the market. With the increase in this recognition, more and more institutions and individuals have begun to hold Bitcoin. The safe-haven value of Bitcoin is specifically manifested in the following aspects.

First of all, Bitcoin was designed as an electronic currency. Its design purpose is to provide a monetary solution other than the existing legal tender. In its design, the total amount of Bitcoin is fixed. This avoids the feature of legal tender issuance. Moreover, the operating mechanism of Bitcoin is automatic and is not controlled by any organization or individual. The total amount of Bitcoin and the mechanism for obtaining use are now automatic. In the past 12 years of development, as Bitcoin transactions have become more and more common, direct exchange transactions between Bitcoin and legal tender have been formed. Bitcoin can therefore be priced based on various legal tenders. As the use and transaction of Bitcoin become more and more popular, it is now becoming a value storage tool and a payment tool. Due to the above characteristics, especially the most basic characteristic of Bitcoin's fixed total amount, it can avoid the mechanism of legal tender issuance, thus forming differentiated competition with legal tender. When legal tender in the market has problems, funds in the market will naturally flow to a differentiated competitive product such as Bitcoin.

In terms of differentiated competition with legal tender, Bitcoin is increasingly showing its differentiated characteristics in practice. When currencies in some countries are highly inflated, the local Bitcoin trading volume has increased significantly. This is the case in Argentina, Turkey, Nigeria and other regions. This shows that the market is accepting Bitcoin as a tool to compete with existing legal tender.

Another basic requirement for being a safe-haven asset is its weak correlation with other mainstream assets. The smaller the correlation, the higher its value as a safe-haven asset. According to a recent report by Coindesk, the correlation between Bitcoin and gold and S&P500 is now approaching 0, and it is also beginning to show a negative correlation with the US dollar. Therefore, in terms of correlation with other assets, Bitcoin has more and more safe-haven value.

In the current US market, the continuous increase in the issuance of US dollars has caused widespread concerns about the depreciation of the US dollar. Therefore, the market naturally chooses to hedge the risk of US dollar depreciation. The recent increase in market interest in silver and uranium indicates this risk-averse trend. Bitcoin has also become a safe-haven asset choice for some individuals and institutions. Now the general practice of financial institutions is to hold 0.5%~1% of their assets in Bitcoin to hedge the market risk of the entire portfolio. Of course, for larger and more conservative financial institutions, such as Mass Mutual and Black Rock, the proportion of Bitcoin they hold in their portfolio is even smaller. At the other extreme of the market, there are also phenomena like MicroStrategy CEO Michael Saylor borrowing to hold a large amount of Bitcoin. At the other extreme, there are naturally a large number of institutional and individual investors who are not optimistic about Bitcoin and choose gold or some types of bonds as safe-haven assets. Therefore, in the US market, in terms of choosing Bitcoin as a safe-haven asset, users' choices are still on a very extreme continuum. But from the current development of the US market, more and more funds will flow into Bitcoin.