Bitcoin is a safe haven in times of crisis

Economists at Kingston University Business School state that for many countries, bitcoin becomes almost the safest asset during an economic crisis.

Jinsha Zhao, a senior lecturer in accounting and finance at Kingston Business School, published the results of a study related to bitcoin investing. Given that BTC can be traded in pairs with different government currencies, this provides an opportunity to study the impact of local economic crises on bitcoin, Zhao believes.

Instead of studying the relationship between bitcoin yields and financial asset returns, Zhao analyzed the relationship between the price of fiat currency and bitcoin trading volumes in 48 countries. According to the scientist, the new approach allowed to find out: how confident people are in the first cryptocurrency as a financial refuge in times of political and economic instability.

In his study, the Kingston Business School professor took into account the exchange rates of 48 currencies between 2014 and 2020. The sample included the U.S. dollar and the euro, as well as the most vulnerable currencies in the global economy. During that period, eight currencies lost more than 60 percent of their value against the U.S. dollar, including the Iranian rial, the Nigerian naira and the Ukrainian hryvnia. Zhao concluded that when currencies fell in value or during major devaluations in the countries analyzed, bitcoin trading there increased significantly.

In the case of the Venezuelan bolivar and Argentine peso, the increase in bitcoin investment preceded the depreciation of those currencies. Citizens of Venezuela and Argentina invested in cryptocurrencies knowingly anticipating an economic collapse, the researcher suggested.

That said, Zhao noted that bitcoin trading volume in the countries studied has declined since the COVID-19 pandemic began. This means that investors still consider bitcoin a risky and speculative asset compared to assets such as real estate, gold and oil. In general, investors see bitcoin as a means to hedge risks caused by the depreciation of local currencies. But not with the global crisis, the researcher concluded.

According to the International Monetary Fund (IMF), countries with high levels of corruption and inflation are more likely to adopt cryptocurrencies. This is confirmed by a report from cryptocurrency exchange KuCoin, which found that 35% of Nigerian adults have traded in digital assets at least once in six months.