Is Bitcoin a Safe-Haven? The Answer the Russia-Ukraine War Gives Us

The leading cryptocurrency was first mooted to be a possible “safe haven” in 2013, following Bitcoin’s rise to $1000. With its new record, came media attention.

As Bitcoin began to gain traction, crypto proponents touted the digital currency as the perfect substitute for gold. In comparison to gold, Bitcoin surpassed the value of the former, matched its popularity, and provided a new asset class for investors. Bitcoin’s merits were not just words laid out in Satoshi Nakamoto’s whitepaper. The world saw its merits. Global institutions adopted the digital coin. However, one claim the world did not establish was Bitcoin’s safe-haven status. 

A “safe haven” is expected to maintain or increase in value during an economic decline. Gold proved itself a safe haven in two major events: the 9/11 terrorist attack and the Great Recession of 2008. The metal increased by 6% to $287 per ounce on the first day of trading after the attack in 2001. And within the period of the Great Recession (2008 – 2012), it spiked by 101.1%. 

In contrast, Bitcoin neither existed in 2001 nor had gained recognition and acceptance during the Great Recession. Thus there was no data to evidence its safe-haven property, not until eight years after the Great Recession.  

Covid-19: Bitcoin’s Preliminary Test as a Safe-haven

The Covid-19 period is understood to be the first true test of Bitcoin’s safe-haven status.

Between January and March 2020, Bitcoin dropped from $10,500 and crashed by 39% in a single day before dipping to $4,106. Going by gold’s past performance and the primary quality of a safe haven, the first quarter of 2020 mocked the “Bitcoin is a safe haven” hypothesis. However, when it recovered almost immediately and peaked at $20,000 by the last quarter, it drew attention to its potential safe-haven status.  

Macroeconomic studies and commentaries offered varying conclusions to Bitcoin’s safe haven’s property. One study showed a co-movement of Covid-19 and Bitcoin, thus suggesting that the digital currency acted as a safe haven. Another study reported that the pandemic affected the efficiency of cryptocurrencies, with Bitcoin and Ethereum being the worst hit. 

This mixed evidence regarding Bitcoin’s safe-haven status made it difficult to establish if it could truly be a haven in economic uncertainty. Anoop S. Kumar and Steven Raj Padakandla were researchers who recently tested the safe-haven properties of gold and Bitcoin. Kumar and Padakandla carried out their tests against the backdrop of Covid-19.

Using a specific correlation approach, the researchers agreed Bitcoin did possess some safe-haven characteristics. This is especially true when considering Bitcoin’s performance to traditional stocks. However, they concluded their study by asserting gold as a better safe haven. For Bitcoin, its safe-haven properties varied across “markets and scales” and demonstrated long-term diversifier characteristics. 

Bitcoin exhibit safe haven property for NSE50 for the short run,” reads their report. “For NASDAQ and EUROSTOXX, Bitcoin exhibit short run and long run safe haven property. Bitcoin is better suited as a diversifier.”

The Russia-Ukraine War: Bitcoin’s Second Test

Every hypothesis needs to undergo a series of tests to confirm its validity. In this way, Bitcoin’s safe-haven claim is no different. 

Two years after the Covid-19 pandemic rocked humanity, world systems—including the financial system—began to see a semblance of normalcy. The safe-haven debate ebbed, only to resurface by the sounds of war in Eastern Europe. 

With Russia’s continuous invasion into Ukraine and the West slamming sanctions, the global economy took a big hit. The primal reaction of investors in such a crisis is to escape volatile assets. So, while assets like gold and the US Dollar surged in value, Bitcoin faced a drastic price drop. On February 24, the first day of the invasion, gold surged by 2.1% to $1,970 per ounce as investors sought safe-havens. Bitcoin, on the other hand, dropped by 6% below $35,000. Yahoo Finance pointed out that Bitcoin’s sharp decline “underscores how the market largely views it as a risk asset.”

Bitcoin plunged further in value as the war escalated and more investors doubted if Bitcoin could be the safe haven they wanted. However, as the war entered the second week, Bitcoin took a dramatic price turn. 

The Twist: Bitcoin’s Price Rally Amid the War

The first week of March saw Bitcoin increase by 25% to $43,000. This was due to Russians turning to Bitcoin to ease the impact of the stringent economic sanctions imposed by the United States, the European Union, and the international community at large. These sanctions devalued the Russian ruble and pushed Russians to find alternatives. Ukraine, which legalized Bitcoin a week before the invasion and received crypto donations during the invasion, also had its citizens turn to Bitcoin since they couldn’t conduct electronic fund transactions.

This dramatic turn caused by these simultaneous events became a deja-vu as Bitcoin’s safe-haven property was debated—again. CNN Business’ Julia Horowitz noted that sanctions from the international community “increased bets that some countries and institutions will start to look more seriously at alternate ways to move money around the globe.” But the big question is: Without these sanctions, would many have sought refuge in Bitcoin?

Safety in Bitcoin’s Rally?

Does Bitcoin’s role in the war as a safe unrestrainable bet increase its claims as a safe haven?

Lux Thiagarajah, BCB Group’s Head of Trading, stated that Russians using Bitcoin as an alternative does not translate to the digital currency being a safe haven. Bitcoin’s extreme volatility is still a key factor dousing the confidence of countries and institutions seeking to hold wealth.

Also, investors turning to Bitcoin only because of sanctions—whereas gold easily surged in value prior to these sanctions—riddles (more) holes in Bitcoin’s safe-haven status. Then there is an interesting irony: Russian investors turned to Bitcoin only as a passageway into other investments. Aljazeera reported that crypto firms in the United Arab Emirates received tons of requests as Russians sought to liquidate billions of dollars of crypto. These clients either wanted to invest in real estate or hold hard currency. Therefore, we could assert that Russians turned to Bitcoin not as a safe haven, but as an escape from the hard bite of economic sanctions.

According to Aljazeera, one crypto firm kept receiving requests from Swiss brokers whose Russian clients feared that Switzerland would freeze their assets. Narrating this event to Aljazeera, one executive said:

We have one guy — I don’t know who he is, but he came through a broker — and they’re like, ‘we want to sell 125,000 Bitcoin.’ And I’m like, ‘what? That’s $6bn guys.’ And they’re like, ‘yeah, we’re going to send it to a company in Australia.’”

So Where Does This Leave Us?

Current data do not supply enough evidence to support that Bitcoin is a safe bet in economic turbulence. Its volatility still serves as a deterrent for many who want a long-term safe haven. JPMorgan analysts predicted that if investors treat Bitcoin like gold, Bitcoin could rise to $150,000. Will this ever happen? Will there ever come a time when Bitcoin’s safe-haven status wouldn’t be in doubt?

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Only time can unwrap the answers. But for now, the world has to wait to test again because, just like the pandemic, the Russia-Ukraine war has not erased doubts. At least, not yet.

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