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Bitcoin is no ‘safe-haven’ against the coronavirus – or anything else

Some market commentators have started to remark on a link between the price of bitcoin and the coronavirus – but a stronger, if equally irrelevant, correlation can actually be identified

18/02/2020

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

2019 proved a relatively uneventful year for bitcoin – at least when judged by its own lurchingly volatile standards. That is probably why, here on The Value Perspective, we never mentioned the cryptocurrency once across the whole 12-month period, which saw the price of a single bitcoin ‘merely’ double from £2,638 on 1 January to £5,425 on 31 December – having steadily tracked lower from its 2019 peak of £9,585 on 5 August.

A new year has brought a new trajectory, however, with bitcoin surging some 30% over the course of January alone – ending the month at £7,074 and only edging back from a recent high of £7,867 in the last couple of days. The explanation? Well, if you accept the current narrative – and as, as a general rule, we strive to avoid doing so – many investors see bitcoin as a ‘safe haven’ asset in the face of the coronavirus outbreak.

Take this recent Forbes article, which finds one commentator plainly stating “the ongoing upward trajectory of the price of bitcoin correlates to the spread of the coronavirus” while another – a representative of a blockchain investment and advisory firm, as it happens – opines: “As trust in global institutions and markets continues to deteriorate, we will see highly mobile digital assets like bitcoin explode in value.”

Not everyone is so convinced, of course, and another market-watcher tells Forbes: “Crypto is neither acting like a safe haven in the face of the virus, nor is it selling off with the other risk assets. Rather, it remains completely uncorrelated.” There’s that word again but, before we consider what bitcoin may or may not be correlated with – and whether that means anything – let’s focus on an even more important point.

An even more important point, at least, for anyone interested in value. If cryptocurrencies were stocks, you might at least stand a chance of working out what they were really worth but, as it is, there is simply no metaphorical bonnet to open up and check underneath. There are no balance sheets to analyse, no cashflows to evaluate – you may as well just stick your finger in the air and check which way the wind is blowing.

Now, as we have acknowledged before in articles such as Eye-watering valuation, every money system is a man-made construct that is dependant for its very existence on an act of faith – that it is worth something. That includes gold but, at the very least, that rather more traditional ‘safe-haven’ investment is a physical, tangible thing. Bitcoin is nothing more than a piece of computer code.

In act, bitcoin does not do very many things a currency is supposed to: it is not a great store of value; it is not especially portable or even liquid; and, as we mentioned at the start, it is so extraordinarily volatile that only a blessed few seem able to discern any rhyme or reason to what it might do next. So far this year, apparently, it is all about the coronavirus but we must pray that remains a consideration for as brief a period as possible.

But what about a longer-term correlation? As it happens, as 2019 progressed, increasing notice was taken of the eerily strong relationship between the price of bitcoin and, er, avocados. As Bloomberg journalist Tracy Alloway tweeted in late November, for example: “The Bitcoin-Avocado correlation is reasserting itself … GuacChain LLC is structurally short Bitcoin as avocado supply recovers and puts pressure on prices.”

The spoof nature of the tweet echoes our own take on spurious correlations, which we have outlined in detail in articles such as in Tangled up with blue and Could Nicolas Cage help save lives simply by retiring? At their heart, however, lies the simple point that confusing correlation with causation is a trap human beings – from academics to investors – fall into time and again.

Still, while some may be happy to invest their money on the basis of causation-free correlations, here on The Value Perspective, we prefer strategies that are not only able to demonstrate outperformance but can also explain why they outperform. This understanding is the only protection from being whipsawed by the short-term underperformance that will inevitably affect all strategies at some point.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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