Looking back at bitcoin and it’s price action since 2015, it’s shocking to see the growth trends it has experienced during periods of global economic instability. Many savvy investors want to know whether or not bitcoin should be in their portfolio to protect their capital in times of economic uncertainty. In this article, we intend to help you answer that question for yourself.
A defensive asset is an asset that can protect an investor from any risks when investing. Such an asset is in demand in financial markets during a crisis in the economy. In other words, during economic growth, an investor can invest aggressively. During a recession, when the preservation of his funds becomes the primary goal, an investor will be more conservative. Traditionally, gold, real estate, national currencies, etc. act as a protective asset.
What kind of Investment is Bitcoin?
Analysts from Grayscale identified three main properties of bitcoin:
- Preservation of value. Bitcoin has a stable value, primarily due to its scarcity (only 21 million bitcoins will ever exist), as well as real assets such as gold.
- Bitcoin has real-world uses for payment of goods or services. Bitcoin is accepted for payment by more than 100,000 companies around the world, many of them Fortune 500 Companies. Here is a list of well-known companies that accept bitcoin payments: Whole Foods, AT&T, Microsoft, Overstock.com, Expedia, PayPal, and others. Also, bitcoin has trading pairs with all significant fiat currencies, making it a universal medium of exchange.
- There is fantastic potential for growth in value due to the increase in the number of companies using blockchain and crypto-assets to manage their business structure, contracts, and finances. This adoption directly leads to a rise in the cost of bitcoin, stimulating demand.
We can say that bitcoin is a transparent, unchanging, and global form of liquidity, which can ensure the preservation of value and has the potential for future growth.
To confirm this thesis, we consider the last six economically unstable situations around the world.
Grexit (April-July 2015)
On January 27, 2015, the leader of the SYRIZA party, Alexis Tsipras, announced the formation of a new government, which caused speculation about Greece’s withdrawal from the “Eurozone.” In the following months, default on Greek debt seemed inevitable. Perhaps the most interesting event of this period was the decision announced on June 28, 2015, by the Greek government regarding the closure of state banks and the introduction of strict control over the movement of capital. These restrictions remained valid for three weeks. During this period, the first serious interest appeared in Bitcoin as a defensive asset not controlled by the state. On July 13, 2015, an agreement was reached to avoid Grexit. In the time leading up to the deal, Bitcoin became the most profitable asset, earning a 28% return.
Changes in the prices of financial assets during Grexit, April 20 — July 10, 2015
Chinese Stock Market Crash (August 2015-December 2016)
On August 10, 2015, the People’s Bank of China announced significant changes in its monetary policy amid turbulence in the local stock market and concerns about the state of the world’s second-largest economy. In an effort to stimulate growth through exports, Chinese politicians lowered the yuan base rate against the US dollar by 1.9% and signaled a transition to a more “market” pricing regime. In August 2015, the strongest depreciation in 20 years of the renminbi against the US dollar was recorded. The reaction of investors was not long in coming, and a massive sale of Chinese securities began in favor of protective assets. From the day of the central bank announcement until the start of the reversal in the Chinese market (January 20, 2016), bitcoin showed the highest price increase, while other assets lost on average more than 10%, and prices for traditional low-risk instruments rose by no more than 6.6%
Stock Market crash in China, August 10, 2015 — January 20, 2016
Brexit (June-December 2016)
On June 24, 2016, panic broke out in the financial market due to the UK’s decision to withdraw from the European Union. Investors began to buy bonds, gold, and yen. In just one day, June 24, of the traditional defensive assets, gold showed the most growth (the COMEX index rose 4.7%), but the price of bitcoin increased by more than 7%. The average loss on other assets was 2.1%.
Quotations decrease during Brexit, June 24, 2016
US Presidential Election (September-December 2016)
In anticipation of the presidential election, the financial markets grew increasingly uncertain. If Donald Trump was elected, investors expected increased geopolitical tensions and trade protectionism. Therefore they began to reduce the share of risky assets in their portfolios. At the same time, due to the policy of quantitative easing, the dollar continued to strengthen. As a result, from September to the end of the November 10 elections, the main assets and financial indices “sank” by 3.5% on average, and the Bitcoin exchange rate grew by 17%.
The reaction of the financial market to the US presidential campaign, September 7 — November 10, 2016
The Trade war between China and the United States (May-December 2019)
Although tensions between the U.S. and China began back in 2018, the worst quarter came in the second quarter of 2019, after Donald Trump substantially increased customs duties on Chinese goods imported into the U.S. In response, China introduced similar measures for products from the United States. According to IMF estimates, trade escalation will negatively affect global finances, destroy many supply chains, and slow down global economic growth, at least in 2019. Moreover, rising commodity prices in both countries led to lower levels of consumption. The most intense phase of the “trade war” came in May. The cost of bitcoin during this period increased by 47%, while defensive assets added only 1–2% in price.
Lower asset prices during the U.S.-China trade war, May 5–31, 2019
Elimination of General Kassem Suleimani by Washington (January 2020)
On January 3, 2020, Washington managed to eliminate General Kassem Suleimani, the commander of the elite special forces unit Al-Quds of the Islamic Revolutionary Guards Corps (IRGC). As experienced several times before, upon a surge of political uncertainty bitcoin behaved like a classic defensive asset and grew by more than 4%.
This collection of examples may be too small to absolutely label Bitcoin as a protective asset, along with gold, but you should not ignore this data. Perhaps with the growth of cryptocurrency market capitalization and a decrease in volatility, many more large investors will pay attention to bitcoin, the digital gold.