Cryptos fail safe haven test

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April 14 2020
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Despite being touted as digital gold, cryptocurrency markets have shed billions of dollars during the pandemic, proving that they are not immune from wider fluctuations in sharemarkets.

According to Monash University’s Dr John Vaz from the department of banking and finance, cryptocurrencies, including bitcoin, have fallen – showing that during a crisis, they actually move the same way traditional assets do.

“Based on the promises of advocates, cryptocurrencies shouldn’t move with fiat-based financial markets, but in fact, we see that it does,” Dr Vaz said.

“So cryptocurrencies like bitcoin do not provide you with a risk mitigation alternative to fiat currency-based investments such as AUD, at least not during periods of crisis. It certainly doesn’t provide a safe haven by any means.”

Cryptocurrency advocates liken bitcoin and its variants to gold in that they have a limited finite money supply. But Dr Vaz said suggestions that cryptocurrency is a hedge that would resist volatile sharemarket fluctuations caused by the COVID-19 pandemic aren’t true.

“It’s no coincidence that the first cryptocurrency was called bitcoin, using semiotics and imagery of gold coins to give off the impression that it’s tangible and trustworthy,” Dr Vaz, who researches cryptocurrencies and their influence on financial markets, said.

“Cryptocurrency is nowhere near as stable as gold over time – a commodity that bitcoin has tried to emulate in a virtual sense.”

Despite not being immune to market downturns, Dr Vaz said they’re still likely to play a role once the current crisis passes, depending on how governments manage the effects of their dramatic growth in spending in fiat-based currencies, related financial markets and the real economy.

“Bitcoin definitely has a place post-crisis if governments make a mess of the fiscal and monetary policy. If people don’t trust traditional money, this could be the Armageddon of fiat currency and bitcoin will be seen as more reliable. It’s all about trust,” Dr Vaz concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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