The dream of every Bitcoin (BTC-USD) maxi, crypto investors that only support BTC, is that non-maxis view it as a safe-haven asset. Why? Because that would break the correlation it has with the Nasdaq, and further the argument that it should be held in most institutional portfolios as a diversifier, rather than a levered tech stock play. Recent movement has been encouraging as Bitcoin has indeed “diverged” – something I argued was likely in the last couple of months.
But perhaps it’s worth redefining what a safe-haven asset is if the real benefit around owning Bitcoin is around hedging counterparty and structural risks in a highly leveraged financial system with decentralization.
Is Bitcoin Really a Safe-Haven Asset?
The implication of this is that Bitcoin has more of the properties of gold, which not only is seen as a hedge to counterparty risk, but also historically does act as a beneficiary of flows during highly volatile, risk-off sequences for the stock market. Gold has had a phenomenal October, with the precious metal experiencing its best run since March. This is coinciding with Bitcoin’s best run since the first quarter. The simultaneous rallies hint at investors possibly migrating to assets not tied to the financial system, not necessarily to less volatile ones.
Though there are similarities in the chart pattern during specific periods, there’s no indication of a long-term correlation between gold and Bitcoin whatsoever. Gold’s correlation to equities is nearly zero, meaning it operates independently. Its correlation to Bitcoin fluctuates between positive and negative, regardless of the market conditions. History thus suggests that under normal circumstances, Bitcoin and gold should not correlate. But their simultaneous sharp rise in October suggests something unusual.
Recall that the last time both Bitcoin and gold rallied simultaneously was in March 2023. This was during the regional banking crisis involving the failure of Silicon Valley Bank, Signature Bank, and Credit Suisse. When people fear their financial institution collapsing, they tend to withdraw their assets. The two most popular assets not tied to the financial system are gold and Bitcoin.
Is this a coincidence?
Perhaps not.
The Bottom Line: Brace Yourself for a Crash
The current macroeconomic landscape provides plenty of reasons to worry. Government debt is skyrocketing, with multitrillion-dollar annual budget deficits predicted for the rest of this decade. Corporate bankruptcies, especially among smaller companies impacted by higher interest rates, are also on the rise. Consumers seem to be increasingly burdened with credit card, auto loan, and student loan debts. With the Federal Reserve seemingly bent on maintaining higher interest rates for a longer period, the situation is likely to worsen before improving.
Could the recent price action in both Bitcoin and gold suggest that investors are beginning to fear that we are on the edge of another financial crisis, if not already in one?
Let’s revisit credit spreads as they also indicate increasing system stresses.
The chart above easily highlights peak market stress levels – the high-yield bond default crisis in 2016, the mini bear market in 2018, the Covid-19 recession in 2020, hyperinflation in 2022, and the regional banking crisis in 2023.
By these measures, the current environment indicates relatively little risk being priced in. However, high yield spreads are rising again. Given data suggesting a significant economic slowdown, spreads might have a long way to climb, and this could happen rapidly if sentiment dramatically worsens. Bank stocks, which currently look dismal, provide further evidence.
Is this the counterparty risk music that gold and Bitcoin are dancing to? I think so. The simultaneous rallies of Bitcoin and gold, coupled with other financial indicators, is sending a clear warning.
Counterparty risk is increasing, and investors must exercise caution and think strategically.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
