Crypto as a “safe haven” tested in stock market slide.

22 Sep, 2021
Crypto as a “safe haven” tested in stock market slide.

A significant narrative about Bitcoin – and all cryptocurrencies – was tested Monday. Stock markets worldwide saw steep declines as they reacted to news that China’s second-largest real estate firm is in deep financial trouble.  The selloff seeped into the digital currency world, with Bitcoin Ether, Solana, and Cardano down around 7 to 8% each, according to Coin360. Other altcoins saw losses as well.

“The catalyst for the swoon was the continued turmoil at China Evergrande Group, one of that country’s top three developers of residential properties,” The New York Times said of the financial market deep decline. “The company has an estimated $300 billion in debt, and an interest payment of more than $80 million is due this week.”

Concerns about the upcoming U.S. Federal Reserve meeting and its subsequent outcomes were said to contribute to the market jitters.

The slide seems counterintuitive to the theory that cryptocurrencies offer a safe haven that investors can rely on to weather financial storms.  This argument is often used when advocates for digital currencies suggest holding crypto to diversify portfolios.

“The moves were the latest signal that the world’s largest cryptocurrency hasn’t achieved the “safe haven” asset status that some of its more ardent proponents have promoted, even as debt levels around the world surge in response to COVID-19,” Yahoo!finance reported.

“Many people have argued that bitcoin is most useful as a safe-haven asset, but that narrative could be changing as people realize its price often goes down with broader declines in risk assets,” CNBC reported. “Bitcoin’s rally this year has coincided with the risk-on rally and, much like stocks, the cryptocurrency is prone to sharp declines in September.”

Categorizing crypto as risky is the alt-narrative for digital coins.

“Traders and analysts said the selloff in cryptocurrencies was part of a wider global shift away from risky assets, in favor of perceived safe-havens such as U.S. Treasuries,” The Wall Street Journal said.

While the selloff may have rattled new traders who dumped their coins, or those who decided to take their profits and sit out on the sidelines, seasoned digital traders, bulls, and whales stepped back into the crypto market Tuesday pushing BTC, ETH, and other coins into positive territory.

“This is part of a well-established pattern where it sells off as traders cash in their riskier assets to cover margin calls and/or sit on the sidelines until markets calm down and they feel more comfortable going back into riskier positions,” Leah Wald, CEO at Valkyrie Investments, told Fortune.

So, will the crypto market ever break away from its relationship with traditional stock markets?

“Although Bitcoin doesn’t always trade in tandem with financial markets -- a characteristic that made it a tempting proposition from a portfolio-diversification point of view -- its correlation on a 30-day basis to futures on the Nasdaq 100 has been consistently positive since February last year,” The Journal said. “A reading of 0.5 -- which it’s close to now -- means they’re moving in the same direction quite often these days.”

Whether crypto continues to follow the financial markets or not, crypto proponents remain steadfast in their belief that Bitcoin and cryptocurrencies are the future of money.

“Every company on Earth is sitting on a balance sheet that is normally cash and credit. Cash and credit are crumbling,” MicroStrategy CEO Michael Saylor tweeted Monday.

While September has traditionally been a slow month for crypto and prices have fallen, October usually brings good news for traders.  That makes Monday’s market slump highly desirable for traders who are ready to buy the tip.

“It gives us a nice entry zone if you wanted to get in the markets,” crypto analyst Michaël van de Poppe said in his YouTube update Tuesday.

The safe-haven strategy for crypto may continue to be tested for now. But for those who understand the underlying value of digital currencies, the tumultuous nature of the markets will not deter investing.

Bitcoin magazine’s meme of Star Wars character Qui-Gon Jinn standing zen-like in the sea of red and green BTC candles summed it up best in one tweet: “When Bitcoin dips no longer affect you.”

Joyce Pavia Hanson

Contributor

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