Sept 25, 2019 09:30 AM | Nick Chong


Since Q2 of 2019, the U.S. and China have been embroiled in another trade war, marked by a barrage of tariffs and political threats.


Bitcoin has taken up a key role in this trade war story, with analysts calling it a "hedge" or "safe haven" in times of macroeconomic uncertainty like today. But there is a fair amount of evidence that Bitcoin isn't the perfect hedge against the Chinese trade war that some analysts have painted it as. 


In this article, we’ll take a closer look at how people are viewing Bitcoin in the context of the trade war, and dig into the numbers to see if what they’re saying makes sense.


Bitcoin Thrust Into US-China Trade War Narrative


If you have perused crypto Twitter over recent months, you have probably noticed a trend: Bitcoin is being seen by investors and analysts — both on Wall Street and on Main Street — as a potential safe haven in the ongoing trade war. 


The recent hiccup in US-China political and trade relations, which has only been exacerbated by the ongoing Hong Kong protests, has led traditional markets into a state of relative panic. The VIX — the CBOE's measure of volatility in leading stock index the S&P 500 — has moved from 12.87 on May 4th (the day before the crap hit the fan) to 17.09 as of this writing, peaking at 24.59 in early August. 


Simultaneously, the world's go-to safe haven assets, namely precious metals, the Japanese yen, and the Swiss franc, have embarked on a notable upswing. Gold, for some perspective, is up to $1,500 — some $240 higher than where it started the year. 


Bitcoin has decisively rallied in 2019 as well, seemingly benefiting from the developments in the trade war. 


Tim Culpan found in early-August that the correlation between Bitcoin and gold has moved from 0.496  to 0.827 since May, implying a strong positive correlation. Just look at the below chart from the Financial Times, which shows that Bitcoin has been somewhat tracing the trend of gold. The correlation isn’t perfect, but it’s enough to raise some eyebrows in the finance industry. 



FinancialTimesBitcoinsafehaven.JPG


Bloomberg also found that the 30-day inverse correlation between Bitcoin and the Chinese yuan hit a record in early September, surging into uncharted territory.

These eerily-timed correlations have led to the aforementioned social trend that touts Bitcoin as a safe haven, especially for Chinese investors. 


In fact, an analysis by Quant Fiction (the nom de Twitter of GM engineer and hobbyist data scientist Brian Blandin) found that institutional investors have increased the frequency of their tweets about Bitcoin. He found that Twitter users identifying as being a "portfolio, fund, asset, or wealth managers" are mentioning both "Bitcoin" and "risk off"/"safe haven" twice as much as they were at the start of the year, based on a sample of 171 individuals with an average follower count of 55,217. 


Clearly, there’s a bit of a buzz about Bitcoin being a trade-war safe haven.


Not a Fully-Fledged Safe Haven; Deal Unlikely to Have An Effect


However, data shows that this “safe haven” narrative may have holes. 


In early August, when both sides of the trade war were exchanging massive blows, an odd market trend emerged. Data from Huobi's over-the-counter trading desk, which is widely known to be primarily used by mainland Chinese investors, showed that Tether (USDT) was trading at a nearly 1.3% discount. Bitcoin, according to Chinese cryptocurrency venture capitalist Dovey Wan, was also trading at a discount in China at the same time. 


Sure, a 1.3% discount — which amounted to around $150 at Bitcoin’s then current price of $11,800 — wasn't much in the grand scheme of things. But in a market expected to have a heavy premium due to the oft-cited safe haven narrative, any discount should be seen as quite shocking. As Larry Cermak, the head of research at The Block, pointed out in an article on August 12th, "[this is evidence] that Chinese investors that were affected by last week's Chinese yuan devaluation, [which was a result of an escalation in the trade war], are not the ones buying Bitcoin."


That's not all. Alex Krüger, a pro-Bitcoin economist and global macroeconomic analyst, recently pointed to data that shows that trade war news — be it the activation of a multi-billion dollar tariff or Trump's latest tirade about how China is responsible for X — has no material effect on Chinese consumers.


In an extensive Twitter thread published September 20th, the analyst pointed out that there has been only one occasion in which search volume for the Chinese versions of Bitcoin, Trade War, and Trump spiked concurrently on Baidu — the search engine fittingly dubbed "China's Google". This was on May 14th, when the Chinese government called for a "People's War" against the U.S. You can see this in the nearly-correlated spikes that come between the April 2019 and June 2019 markers in the chart below:


baidu-chart-fixed.jpg


In terms of prices, there has only been one time that Bitcoin "reacted" to a breaking trade war headline in real time. Krüger, in a separate thread, noted that this event was when Trump issued a multi-part thread on China's supposed "intellectual property theft" and the hundreds of billions of dollars in tariffs he planned to place on the nation. Bitcoin did rally by some 0.5% in the minutes after the tweet. But that's all that took place: less than a 1% gain for an asset supposedly meant to become "gold 2.0" on a massive trade war escalation. 


If a thread on how $550 billion of Chinese goods were to be taxed at an extra 5% — not to mention how Trump implicated Chinese actors of multiple dubious acts — didn't cause a splash in the Bitcoin market, would it be fair to call it a full-blown safe haven? Not really. Because on that same Trump tirade, gold surged by 2%, which is massive for a $7 trillion asset class. 


Even if you see the 0.5% rally as a clear sign that Bitcoin is affected by macro, your thesis may be misguided. 


Peter Schiff, a prominent libertarian-leaning investor and gold proponent, has pointed out that Bitcoin's price action in the wake of trade tariffs news looks more like people speculating on BTC being a safe haven, rather than the asset actually being a risk-off trade. This, Schiff postulated, is a theme made evident by the fact that shortly after Bitcoin rallies in tandem with news on the US-China brouhaha, it crashes, showing that it can't hold its safe haven-induced gains. 


Crypto Moves Independently of the Yuan, And Everything Else


Not only does Bitcoin not act like a true safe haven, the cryptocurrency doesn't react to fundamental news. Investors are becoming acclimated to the fact that Bitcoin moves without rhyme or reason. 


As readers likely remember, Bitcoin surged by $1,000 on an early-April day to kickstart this ongoing bull trend. Despite what some have said about the "institutional herd" or what have you, there was no explicit catalyst that sparked the 20% daily move. And if you were to look to other instances of dramatic Bitcoin price appreciations or depreations, you would also find that there were few fundamental triggers for said price action. 


Even cryptocurrency industry executives struggle to answer the question of why Bitcoin moves, or at least don't claim that fundamentals are purely behind the day to day price action. In a Bloomberg Television segment in mid-May, ShapeShift's CEO, long-time Bitcoin advocate Erik Voorhees, claimed that the BTC rally was simply a byproduct of cryptocurrency's cyclicality and a "confluence of individuals" making their decisions to buy BTC in rapid succession. 


So sure, Bitcoin outperforming traditional asset classes amid an entrenched period of geopolitical turmoil and recession fears is a sign that it might be non-correlated and unaffected by downturns in traditional markets. But to call it a viable safe haven play might be a bit shortsighted… at least for now.


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