The true test of any asset class comes not during good times but during tumultuous times. Its easy to root for an investment when the world is peaceful, but life has its ups and downs. This applies to cryptocurrency just as much as any asset class. How will Bitcoin and other digital assets behave when the peace is threatened?
Unfortunately, theres no easy answer to this question; after all, Bitcoin, the original cryptocurrency, has only been around since 2009. Thats when the mysterious Satoshi Nakamoto created the code for the digital ledger on which Bitcoin is built and maintained. It also happens to be the year when the U.S. stock market bottomed out.
There hasnt been a sustained financial crisis since Bitcoins creation. Therefore, it could be claimed that Bitcoin and other cryptocurrencies havent really been put to the test. There was, however, a recent mini-shock that tested out cryptocurrencys ability to function as a safe haven.
It didnt last long, but I believe that after the dust settled, Bitcoin emerged stronger than ever and convincingly demonstrated it has what it takes to serve investors as not just a vehicle of speculation, but a financial safety net.
The evening of Jan. 7 brought back feelings of fear and uncertainly the global markets hadnt experienced in quite a while. Everywhere you looked among financial headlines and social media, you could feel a sense of panic developing.
Iran had just reportedly fired over a dozen missiles at multiple U.S. military air bases located in Iraq, and there were concerns that American service members might have been harmed in the attack. Secretary of Defense Mark Esper ominously stated, We are not looking to start a war with Iran, but we are prepared to finish one.
The series of missile attacks, it seemed, were a retaliatory act against the United States killing a top Iranian general. President Donald Trump raised the stakes and the tension by hinting at the possibility of retaliation, tweeting that he was looking at 52 potential targets very important to Iran & the Iranian culture.
While we now know in hindsight that the threat of full-scale war fizzled out within a couple of days, lets not forget how scary it was in the moment. Sure, there have been trade wars and currency wars since Trumps election, along with multiple rounds of political posturing between Trump and North Korean leader Kim Jong-un. Yet, this marked the first time that Trump possibly had to respond to the killing of American military forces and the first time in years that the American markets had really felt the shock waves of potential wartime conflict.
Futures for the S&P 500, Dow Jones Industrial Average, and NASDAQ all fell sharply upon the news of the missile attack. Due to the Middle East connection, WTI crude oil futures increased in price, reaching around $65.50 at one point. Established safe havens gold and silver also increased in value, as one might expect during such a time of conflict and uncertainty. The true standout in the financial markets, though, was cryptocurrency but not every cryptocurrency, as one well-known digital coin truly outshone the rest.
Much to the surprise of the financial peanut gallery on social media, Bitcoin touched its highest price of the year so far. Amid all the turmoil and confusion, at one point in time it managed to reach $8,438. This represented a 24-hour price gain of more than 6%; in other words, Bitcoin actually managed to outperform oil during a crisis in the Middle East.
To be honest, other cryptocurrencies simply didnt measure up. During those same 24 hours, Ethereum (ETH) was basically flat and Ripple (XRP) actually declined by 3.5%. Other popular cryptocurrencies had mixed results during this tumultuous time; among the most famous cryptos, however, Bitcoin was the clear winner.
Digital Asset Capital Managements head of trading, Joshua Green, asserted that Bitcoins price performance was a response to these geopolitical events. I tend to agree with this assessment of Bitcoins price action throughout that unsettling time: when it came time for traders to hide out in alternative assets, Bitcoin was an obvious choice.
It also helps that Bitcoin trades 24 hours a day, seven days a week. Its also tradable on every continent in the world, making Bitcoin a convenient place to store assets when market volatility erupts. Besides, most people dont have a futures trading account, and I dont see that changing anytime soon because futures trading is relatively complex.
Meanwhile, more people are learning how to trade cryptocurrency, and Bitcoins brand-name recognition remains unrivaled in the domain of blockchain-based assets.
This is just one incident and we cant form any major conclusions yet. Still, its encouraging to see Bitcoin do well in these circumstances, even if the broader cryptocurrency market lagged somewhat.
Hopefully Bitcoin will maintain its value the next time its put to the test as a safe-haven asset. But in this instance, at least, Bitcoin passed with flying colors.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
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