Bitcoin Safe Haven Status is Called Into Question

As geopolitical news become more prevalent during August, certain safe-haven assets become more attractive. For example, gold prices during the month of August rallied 9% and silver prices were up nearly 14%. Surprisingly, during August bitcoin versus the US dollar was down 6% for the month and could be losing its safe-haven status.

What is Safe-Haven Status?

When riskier assets trade under pressure due to factors such as geopolitical risks, certain hard assets become more attractive. For example, gold is often viewed as a safe haven currency. Gold at one point was a benchmark for global currencies, similar to the way the dollar is viewed around the globe. When the dollar comes under pressure and US yields move lower, traders generally tend to look for an asset that will retain its value. For a while bitcoin was looked at as a potential safe haven asset. Since bitcoin can not be manipulated by a central bank, and it does not have a borrowing rate, traders used to view this liquid digital currency as a safe-haven asset.

What has Happened?

While many believe the drop-in bitcoin crypto trading, prices were a function of lack of safe-haven status, others believe that the lack of liquidity has put pressure on the futures market. According to the Commodity Futures Trading Commission, approximately 50% of the open interest for Bitcoin futures contracts is set to expire on August 30, which was a harbinger of price volatility. For traders to hold on to long or short positions they need to roll their contracts. This means that a trader would need to sell the short-dated contract and simultaneously purchase the deferred contract.

The Term Structure of Bitcoin Weighs on Prices

This represents a problem because of the term structure of the CME-futures curve. Currently the bitcoin futures contracts are in contango which is a term that means that the deferred contracts are at a higher price then the current or spot contracts. This means if you plan to sell your spot August futures contract and buy a September future contract you will pay away 1-big figure. This is because the price of the September contract is $1 higher than the August contract. With the price moving lower, many traders are just selling their spot contracts and waiting to see what happens. In addition, during the summer, volume and liquidity dry up. There should be an increase in liquidity after the US Labor Day holiday which is during the first week of September.

Summary

There appears to be a combination of factors that have weighed on bitcoin prices. The first is that it appears to have lost its safe-haven status. The second is that volume and liquidity have dried up during the latter half of the summer. Lastly, the term structure of bitcoin futures contracts has led to additional selling without offsetting purchases.

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