Are Cryptocurrencies and Especially Bitcoin Safe Havens?

Many people tends to think that Bitcoin and other cryptocurrencies are safe havens. But is that true? To understand that some things need to be clear.

First, cryptocurrencies are just another financial asset, as stocks, bonds, commodities and even real money that can be traded. Second, as happens with those other assets they are subject to speculation. Third, as economic laws indicate the smaller the market the bigger the opportunity for speculation in terms of huge variations in its price. And four, and probably the most important, money is moved from less profitable to more profitable assets and its profitability is directly related with the risk. The higher the risk, the higher the profit.

This last point is a very important one, because right now there is a lot of hype with the increasing in valuation of Bitcoin and other cryptocurrencies. But lets focus in the last two points. What happens when a market is small? That somebody with big money can easily influence the price up or down of the asset traded in that market, giving as a result high fluctuations in its value. But what is the purpose of that person, to set a trend against which to speculate in order to keep profits. An example is when somebody suddenly starts buying at low prices a big amount of an asset, that changes the demand-offer proportion of the asset, increasing its value and others start to follow it under the expectation that the trend will last a long time, but at higher prices, but once the expected profitability threshold of the big buyer is reached, this buyer starts selling the asset with a huge profit and by so changes the market trend from buy to sell, changing again the demand-offer proportion, decreasing rapidly the value of the asset and making the late comers to have small profits or huge losses.

So as economic laws have shown the higher the fluctuations the higher the risks, but also the higher the profits for those setting the valuation trends of the assets, and this point shows that the risks in cryptocurrencies are high because their value fluctuations are high, but also the daily traded values are small, which means that anybody who would like to set a trading trend up or down and speculate with it, don't need to invest a lot to do it.

And when you see the amounts traded daily in bitcoins the amounts are quite small compared to the amounts traded at the conventional stock exchanges. But how Bitcoin trading trend compares with other assests considered as safe havens like gold?

As can be seen from the images below gold and bitcoin have a similar behavior is terms of trading trends for the last few years. Both had a declining trend from late 2013 to late 2015 and since then both have an increasing trend, of course less steep in the case of gold, but an increase already, and the main difference is the high valuation peak taking place during this year for Bitcoin, that is clearly a speculative one in the last few weeks, and as always is expected to come to an end when speculators reached the expected profitability threshold, similar to what happens to the Bitcoin valuation peak of late 2013.

Therefore Bitcoin and other cryptocurrencies are not necessarily a safer haven, because they are not isolated from market laws and under those circumstances are even more vulnerable than more traditional assets like gold, because their market is more subject to higher valuation fluctuations.

So, if you were thinking in taking your savings and invest them in cryptocurrencies. Think it twice and don't put all your eggs in the same basket.

coinmarketcap.com

goldprice.org