Bitcoin Morphs Into Unlikely Sanctuary as Market Turmoil Rises

(Bloomberg) -- Investors the world over are finding an unusual place to hide as the trade war between the U.S. and China roils global markets: Bitcoin.

Investors piled into safer securities such as sovereign bonds on Monday after China struck back in its trade dispute with the U.S. and let its currency weaken through a milestone level. Major cryptocurrencies, increasingly seen as a refuge during distressed times, also rose, with Bitcoin gaining more than 14% and smaller peers including XRP and Litecoin each rising more than 5%.

“It definitely appears to be acting somewhat like a safe haven,” said Brad Bechtel, head of foreign exchange at Jefferies LLC. “When markets are calm and rallying, then Bitcoin sort of falls by the wayside," he wrote by email. "But every time we see turbulence in the market and it starts to sell off, you see Bitcoin” and other safe-haven assets rally.

Risk assets across the world slumped after President Donald Trump threatened to impose a 10% tariff on Chinese imports that weren't yet subject to levies. China responded on Monday, letting the yuan tumble to its weakest in more than a decade and asking state-owned firms to stop importing U.S. agricultural products.

Crypto trading volume increased midday Monday in Hong Kong and there was a strong uptick in exchange inflows of stablecoins, according to data from TokenAnalyst. That, coupled with the price spike in Bitcoin, indicates strong Asian interest behind the initial price surge, said Sid Shekhar, the firm's co-founder.

The Chinese trade dispute escalation is just one point on a growing list of geopolitical disruptions worldwide: There are also ongoing protests in Hong Kong and tensions are rising between the U.S. and Iran over its seizure of foreign oil tankers in the Persian Gulf. Uncertainty is also flaring in India, where the government scrapped the special status for a troubled state. In the U.K., analysts are warning of the potentially disastrous consequences of a no-deal Brexit.

That's allowed investors to seek shelter elsewhere, including digital assets, which are attractive because they're accessible by traders worldwide and are isolated from government interference due to their decentralized structures. Cryptocurrencies also gained in May, for example, another time the U.S. president threatened to ramp up tariffs on Chinese goods."

Piling into digital assets when markets are rocked is a relatively new phenomenon. In times of turbulence, investors typically park money in assets such as U.S. Treasuries, which are government-backed, or gold, which is seen as a hedge against inflation and a weakening dollar. Buying the Japanese yen is also a classic trade: The country's holdings of everything from U.S. government bonds to foreign real estate make it attractive.

Volatility Surges

But the performance of those assets is generally well understood, whereas Bitcoin is volatile and exhibits behaviors not necessarily inherent to classic safe havens, said Dave Balter, chief executive of Flipside Crypto Inc. in Boston. For those piling in because they think Bitcoin is a safe haven, “the risk is they're going to wake up one day and see it drop 20% or wake up another day and see it rise 20%,” he said by phone.

“It always feels good when things are going up and bad when they're going down but a safe haven frankly shouldn't do a move quite like that. They'll probably learn it's not a safe haven as traditionally defined,” he said.

In fact, the average daily change for Bitcoin over the last month is more than 4.7%, according to data compiled by Bloomberg, with the digital token seeing four double-digit percentage moves since the beginning of July. That compares with an average move of 0.8% for gold over the same period.

Those bets might not pay off should tensions between the U.S. and China thaw, according to Marc Chandler, chief market strategist at Bannockburn Global Forex. It could “take the wind out of cybersecurity sails once again,” he said. “I wonder how many times people can be burned before they give it up completely.”

--With assistance from Kenneth Sexton, Luke Kawa and Olga Kharif.

To contact the reporter on this story: Vildana Hajric in New York at vhajric1@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Dave Liedtka, Andrew Dunn

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