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How has Bitcoin held up during the recent market stress? (Photo by INA FASSBENDER/AFP via Getty ... [+] Images)

Some argue that Bitcoin is potentially a robust defensive asset, somewhat like gold. This is Bitcoins first major U.S. recession, when these sorts of assets can do well. How is it doing?

So far its performance has been mixed. Bitcoin has held up better than many stocks, but has fared less well than many other assets that can protect portfolios at times of market stress. For the year to date, Bitcoin has fallen 5%. Thats much better than the S&P 500 which is off 14% for the year. Nonetheless, other assets that can offer safe haven at a time of crisis have risen. For example gold is up 11% and a diversified portfolio of bonds is up 4%.

Hence if you view Bitcoin as a sophisticated digital form of gold, it hasnt quite played out that way during this crisis so far. However, we should note that we may still be early in seeing the full economic impact of COVID-19. As such its hard to reach a conclusive verdict until the economic impact has played out in full. Ideally, youd want to look across multiple economic cycles too, though since Bitcoin is a relatively young asset, this is not possible.

Furthermore, though on a near term view Bitcoin hasnt done what many other safe haven assets have done, it is of course noteworthy that on a 5-year view Bitcoins return still dwarfs just about any other major asset class because Bitcoin has risen over 30-fold over that period.

So it doesnt appear that Bitcoin behaves as a safe haven asset at this point. Whereas high-quality bonds and gold have risen over the crisis, Bitcoin has not. Still, it is also somewhat early to reach that determination. Bitcoin has outperformed stocks by a substantial margin and potentially remains a less correlated assets, that still means it can potentially play a role in portfolios. That is to say, even though Bitcoin may not necessarily rise in times of crisis, it follows its own supply and demand drivers and that can be useful in managing risk. A similar example might be other commodities such as oil. In this crisis oil has had a massive decline as a price war has occurred in conjunction with the COVID-19 outbreak, but at other times of crisis oil has performed very well. Holding lots of different assets from stocks to Bitcoin to oil in portfolios can potentially smooth returns over time compared to holding individual assets in isolation.

Also, one role of Bitcoin is to potentially protect against the falling value of currencies such as the U.S. Dollar. Interestingly, so far this crisis, the U.S. dollar has risen quite strongly on a trade-weighted basis and is up around 8% for the year so far. That creates a headwind for Bitcoin when you are assessing its price in dollars. Indeed, though a future crisis could involve a weakening dollar, and that may bode well for Bitcoin, this crisis has definitely not played out that way so far.

So, we can say that so far in this recession, Bitcoin hasnt quite behaved as a safe-haven asset and there are probably better strategies to protect your portfolio. However, Bitcoin can still diversify portfolios to some degree, and that makes it potentially useful. Plus its still early to assess the performance of Bitcoin. For other major asset classes we have over a century of data across many economic scenarios, for Bitcoin we have a little over a decade.

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How Has Bitcoin Performed During The Crisis? - Forbes