Bitcoin vs. Bonds

Which provides a better safe haven in troubled economic times?

Fear is one of our great motivators. Since the earliest days of humanity we’ve taken action when we’re scared, running from that mean old bear back to the safety of our cave. Today, we run away from the mean old bear in the market and put our money into a “safe haven.” That’s an investment less risky than a tumultuous stock market and one that might even increase in value over time. The usual safe havens include gold, cash and government bonds.

For the sake of argument, let’s set aside the question of whether or not putting money into a safe haven is a smart thing to do. In practice, investors buy safe havens as a hedge. Traders, on the other hand, attempt to get in ahead of the investors and buy the products not as a safe haven but as speculation when news comes out that could spook investors. That can exacerbate the short-term price changes in precious metals and bonds. 

In particular, US Treasury bonds seem like a natural choice for a risk-averse investor. They are relatively low risk (about ½ the volatility of equity indexes) and backed by the full faith and credit of the United States government. When investors are scared, they often put money into US bonds. 

When Israel went kinetic with Iran last week, Americans woke up to the news on their phones. But the market was already way ahead of them. Stocks were down, and gold was up. That’s not surprising when bombs drop and missiles fly. 

But a funny thing happened on the way to the chaos. 

While the stocks were falling, US bonds were falling, too. And one of the most volatile assets out there was rallying – bitcoin. Could bitcoin be a safe haven? 

When it comes to educating investors, any kitchen-table financial advisor can define bonds. But even active crypto traders can have trouble understanding bitcoin. So, is bitcoin a real safe-haven or just a speculative tool? And does it matter? 

Put simply, bitcoin is a currency. Its transactions are tracked on a blockchain ledger and don’t rely on banks or government treasuries to provide security. Bitcoin is “mined” by finding the next block in the blockchain. That’s what those acres of supercomputers in the news are doing. The computational work they perform maintains the blockchain and makes it more secure, and the reward for doing that work is a bitcoin. The important point about the blockchain is that it is decentralized. There is no one person, company or country that owns or can shut down the blockchain. By extension, bitcoin is decentralized, too.  

The supply of Bitcoins is capped at 21 million coins. When demand is high to execute transactions in a currency, like the US dollar, Japanese yen or European euro, the price of that currency can increase. So, when the demand is high to execute transactions in bitcoin – to pay for something in bitcoin or receive funds in bitcoin – because of its security and decentralization, the price of bitcoin can go up, too. 

So, with a growing number of people buying bitcoin as a long-term investment or as a short-term trade, it’s not surprising it could begin to be considered a safe haven. Sure, bitcoin is volatile. But considering the downgrade in US Treasuries’ credit rating and central banks reducing their holdings in them, it could become tougher to see bonds as a safe haven. That could be one reason why Treasury bond prices have been lower to flat even as stocks have been more volatile. 

So, put bitcoin on your watchlist, and check out what it’s doing when you wake up. It might give you a hint about what’s happening in the world. 

Tom Preston, tastylive chief market strategist, is responsible for the brokerage’s trading strategy, client-facing trading software and futures trading products. He contributes to Luckbox magazine and writes tastylive's Cherry Bomb newsletter. He's been trading options since 1992.