The Best Safe Havens for Investors
Ever since Satoshi Nakamoto released the bitcoin whitepaper, the cryptocurrency has been finding its place in the global economy. And as the asset matures, analysts are increasingly suggesting that bitcoin could be behaving as a safe haven asset.
In times of uncertainty, investors flock to safe havens which act as a steady anchor, or even increase in value as other assets are tossed around in the storms of volatility.
Through the ages, various different precious metals, currencies, and equities have been singled out as safe havens—but what makes an asset act in this way, and how does bitcoin stack up as a digital safe haven for the 21st century?
💴 The Japanese Yen
When markets across the world are plummeting, the Japanese yen can often be found making new highs. The reason for this comes from Japan's unique history as an isolated country with an inward-looking economic policy.
High trade surpluses and a population of keen savers both help Japan to maintain a stable economy, but it is the unique economic policy of ultra low interest rates that really make the yen popular as a safe haven.
In fact, these interest rates are sometimes so low that they can dip below zero—leading investors in the country to seek opportunities around the world to grow their money.
When economic uncertainty strikes, these Japanese investors get nervous, and trillions of yen are poured back into the country—pushing up the value of the currency.
At least, that is the widely accepted story explaining why the yen acts as a safe haven, but as the Japanese economy opens up to the world, this story is becoming more of a myth.
Nevertheless, old habits die hard in financial markets, and the Japanese yen is still widely perceived as a safe haven asset.
Earlier this year the currency lived up to its reputation and surged five per cent in five weeks after the biggest tech company in the world Apple warned of a global economic slowdown.
💶 The Swiss Franc
Just like Japan, Switzerland has its own unique history that gives its currency strength and stability during times of crisis.
When WWII ended, Switzerland was seen as a secure and politically neutral place to hide wealth, and gold plundered by the Nazis poured into the country.
Today the country boasts a stable economy with large trade surpluses, and is still seen as a secure place to store wealth—for legitimate reasons as well as tax evasion!
When market turbulence hits, investors flock to the Franc, just like they did when the Turkish currency crisis sent shockwaves through the global market in 2018. As the crisis reached a crescendo, equities plummeted and the Swiss Franc soared—pushing up four percent as the global risk attitude switched.
💵 The US Dollar
As the world's official reserve currency, governments around the world typically hold large amounts of the greenback.
Not only is the dollar the de facto currency for international business deals, but almost 40 percent of the world's debt is issued in dollars and the currency offers higher-than-average interest rates. This makes it a standard safe haven choice, particularly for big business.
As tensions between China and the US have ramped up over the last year, the dollar has found even more safe haven appeal, and the dollar index (DXY)—which measures the dollar against a basket of other world currencies—has pushed up accordingly.
The Incas called it the sweat of the sun, the Egyptians believed it held magical powers, and even today, there is no shortage of goldbugs who believe that gold is one of the only assets of real worth.
Even after thousands of years, gold continues to shine in times of crisis, and features in many professional portfolios as 'insurance' against economic turmoil, and as a hedge against the inflation and the devaluation of paper money.
Gold is also popular because of the inverse correlation it is widely thought to have with the US dollar.
While this is true in some cases, both gold and the dollar can appreciate at the same time, which leads some experts like John Hathaway to suggest that the correlation is just a myth.
Nevertheless, the asset remains a strong safe haven asset to guard against what Hathaway calls the turning of citizens into 'lab rats' as governments experiment with monetary policy:
"We are may be at the beginning of a loss of faith in public policy, and in monetary policy. This experimentation they have, I feel like a lab rat—with zero interest rates, and no return on my savings account"
Most recently, gold has seen renewed interest amid fears of Brexit, downturn in China, and perhaps most significantly—the escalation of geopolitical tensions between the US and Iran.
With traditional safe havens, the strength of the asset depends on its unique correlations, or its ability to derive value from a source that is not affected by the forces disturbing the rest of the market.
But as a new asset, bitcoin has not yet developed clear relationships with the rest of the global economy, and relies on its own economic model.
Even in the event of trade wars decimating national currencies, bitcoin should theoretically stay buoyant, and some evidence suggests that this lack of correlation is already causing it to act as a safe haven.
Back in the Cyprus EU bailout of 2013, analysts suggested that geopolitical events were pushing up the price of bitcoin. Then in 2015, Reuters reported that the Greek Debt crisis could be responsible for a bitcoin rally.
In 2018, the story repeated itself, and the US Government Shutdown was reported to be responsible for another rally, with some suggesting that bitcoin was acting as a “Chaos Proxy” that responds to loss of faith in centralised institutions.
While there is no consensus among analysts of bitcoin's behaviour as a safe haven, the idea of holding a small amount of the cryptocurrency to serve as an entirely uncorrelated asset is gradually gaining acceptance with portfolio managers.
As bitcoin matures and the developing infrastructure creates more doorways for investors to enter, this acceptance could spread—leading more investors to buy bitcoin in times of crisis and making the cryptocurrency a strong contender for the safe haven of the 21st century.