‘Correlation does not imply causation’ is a famous phrase with economic experts and traders. It refers to the discrepancy in the cause that assets classes seem to project at times. Bitcoin’s gains in the last couple of months have been attributed to the US-China Trade War.
What led to the debate?
Moreover, the recent plunge in the stock markets with a surge in Bitcoin has further strengthened the belief of Bitcoin proponents. Bitcoin gained about 23.5% since Trump’s announcement of a renewed Trade-War with China. On the other hand, the Dow Jones Industrial Average dropped by 1500 points, about 5.5% since the announcement. Tom Lee, said earlier that these correlations are indicative of Bitcoin taking its place as a safe haven.
However, while the crypto-market strongly believes in the cause, there are still oppositions to it. According to Fawad Razaqzada, an analyst at Forex.com, the correlations might be short-lived. He emphasized that is probably is a short-term trend than a long-term confirmation.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz, also expressed similar doubts. However, he also attempted to justify it with a probable cause. He tweeted,
Some market observers attribute today’s sharp rise in #Bitcoins to #cryptocurrencies being the beneficiaries of capital outflows from #China. It may be more an expectation that a current reality. Having said this, it’s consistent with narrowing options for Chinese capital flight. pic.twitter.com/EY4EqK5IJa
— Mohamed A. El-Erian (@elerianm) August 5, 2019
During tumultuous times, the traders turn to safe havens such as government bonds, gold, and even foreign currencies like the Japanese Yen. Moreover, the market capitalization of these assets is much larger than Bitcoin.
The Governments of the affected regions in China and the US will also look to remedy the situation. China can be expected to increase global ties with Europe and Japan to increase revenue.
Moreover, the arguments for increasing institutional investment in Bitcoin is also debatable. Marcus Swanepoel, CEO of London-based cryptocurrency platform Luno, said that the narrative of Bitcoin investment is still aligned to its outsized gains. He said,
“If you’re wrong, you’re not losing lots of money, but if you’re right we are talking outsized returns,”
Due to the risks involved with Bitcoin, investors choose to add only small amounts of cryptocurrencies in their portfolios. Since exposure to Bitcoin of more than 5% in a portfolio sharply increases the risk as well.
Do you think that Bitcoin is a safe haven or it still has a long way to go? Please share your views with us.