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Bitcoin – the "Not-So-Safe-Haven"

Updated: Jan 25

By Daniel de Kock, Chartered Wealth Manager


In light of what has been an awe-inspiring “Santa Rally” from Bitcoin (BTC) in the last quarter of 2020, returning around 170%, interest in Satoshi Nakamoto’s flagship cryptocurrency has once again skyrocketed.

Some investors have argued that the recent rally due to mid-May’s “halving” event whereby the rate of supply of Bitcoin to miners is effectively halved. However, despite the force of Adam Smith’s “invisible hand”, it is the opinion of the author that the Q4 2020 rally has not been due to fundamental shifts in Bitcoin, but rather external factors.

With near-zero interest rates, in some cases, negative, dominating the market; admittedly, the opportunity cost of holding a non-income yielding asset is zero. Furthermore, from a technical analysis perspective, currency trends have historically tended to be stubborn, and the market appears to be pricing in the same for the recent bear market for the Greenback.

The above coupled with “Robin Hood” optimism, global political uncertainty, and the saturation of capital markets with public capital has created the perfect storm to justify investing in a “decentralised” asset, accelerating Bitcoin’s returns.

While there are arguments both for and against investing in the cryptocurrency, one particular argument must be taken with a pinch of salt. Many Bitcoin proponents avidly argue that the coin is a safe haven asset and have even gone so far as to hark Bitcoin as the successor to gold as the future “go-to” safe haven asset.

Some studies have provided evidence to suggest that Bitcoin can be a hedge or diversifier for certain currency risks.[1] However, from a risk-management perspective, portfolio managers and retail investors should be careful before employing Bitcoin into their risk management strategy.

Notably, there is evidence that around 95% of the digital asset is currently owned by around 2% of anonymous ownership accounts, and an exit of one of these “whales” could be disastrous for anyone with a large Bitcoin exposure. An investor should introspectively evaluate, “would I invest in a market where 2% of participants own 95% of the market?” [2]

Furthermore, most rational and educated investors would seriously question the sustainability of an asset that returns 170% in three months, however, with Bitcoin there is an air of "what will it do next?" Of course, past returns are not a reliable indicator of future result.

Ignoring the speculative potential of Bitcoin, historically the king of cryptocurrencies has not held up well as a safe-haven asset. During the Covid-19 bear market, Bitcoin was shown to correlate positively with downward markets. Although it is well known that diversification benefits have been shown to decrease in times of high market volatility. [4] [5]


As has been well documented by Daniel Kahneman and Amos Tversky's “prospect theory”, the utility experienced by an investor is asymmetric between losses and gains. Specifically, investors have a greater sensitivity to acute losses than the equivalent gain. [6] The author thus assumes that those wishing for a “safe-haven” asset are looking for downside protection. Thus, we will idiosyncratically compare Bitcoin to Gold on several downside measures of risk, namely Drawdown, Semi-Deviation, 10-day Historic Value at Risk (VaR)and 10-day Parametric (Corner-Fisher adjusted) VaR.

Table 1 – Downside Measures.

Source: Bloomberg – 31.12.2020

Graph 1 – Gold Drawdown.

Source: Bloomberg – 31.12.2020

Graph 2 – Bitcoin Drawdown.

Data Source: Bloomberg – 31.12.2020


Drawdown is the decline from a historic peak in a variable; it shows the maximum loss you could have made assuming you bought and sold at the worst possible time.

Over the past five years, Bitcoin's worst possible drawdown stands at 83.1%, almost five times greater than Gold's worse possible drawdown of 17.42%


Where standard deviation looks at both upside and downside risk, semi-deviation looks only at negative return fluctuations and the risk associated with it. Semi-deviation tries to determine the severity of the downside risk associated with an investment.

Once again, Bitcoin proves that it has exhibited a substantial amount of downside risk in the last five years compared to Gold.

99% 10-day Value at Risk (VaR)

When using the value at risk measure, we are interested in making a statement of the following form: "We are X per cent certain that we will not lose more than V dollars in time T."

The variable V is the VaR of the portfolio. It is a function of two parameters: the time horizon, T, and the confidence level, X per cent. It is the loss level during a time period of length T that we are X% certain will not be exceeded. The author has chosen a period (T) of 10 days and a confidence level (X) of 99%, in line with risk management convention.

Historic VaR looks at the 99th percentile of worst observed daily returns over the 5-year period and adjusts it for a 10-day period.

Parametric VaR assumes that returns are normally distributed with a mean and variance equal to the historically observed mean and variance. As a stylised fact of asset returns is that they tend to have negative skew and excess kurtosis (fat tails), the “Z-score” for the observation is then adjusted for this negative skew and excess kurtosis using the Cornish-Fisher expansion.[7]

Comparing the Parametric VaR of the two assets, once again, the value of your portfolio at risk is much greater with Bitcoin than in Gold. To quantify the above statistics, if you had invested USD 100 in Gold, you would be 99% certain you wouldn’t lose more than USD 9.63 over a ten-day period, however, had you invested USD 100 in Bitcoin, for the same confidence level, you would not expect to lose more than USD 45.89 over the same period.

Holistic Analysis

Very few investors would allocate 100% of their portfolio in a single asset. So the question begs, what if one had a 5% exposure in either alternative asset? A 5% exposure to alternatives is assumed to be suitable in a well-diversified portfolio.

In a holistic context, when a 5% exposure to Gold or Bitcoin is introduced into an equity-only portfolio which naively diversified across various MSCI USD Net Total Return Indices, the parametric VaR yields the following:

As one might expect, Gold reduces 10-day VaR; however, the introduction of a 5% allocation to Bitcoin actually exhibits “di-worse-ification”. This is in line with similar findings by Thomas Conlon and Richard McGee following the 2020 Covid-19 market downturn, during which they found that “the S&P 500 and Bitcoin move in lockstep, resulting in increased downside risk for an investor with an allocation to Bitcoin”. Based on their results they also conclude that “Bitcoin does not act as a safe haven.” [3]


In his speech to the American enterprise institute regarding the dot-com bubble, Alan Greenspan famously said Alan, “…how do we know when irrational exuberance has unduly escalated asset values…”?

Following the release of several vaccines, a frustrated global population looks ahead with hope to 2021. There is a large likelihood that the "Santa Rally" is another prime example of irrational exuberance and the author would warn any investor to carefully consider the risks of being caught up in a crash like that of the 2017 cryptocurrency bubble.

Both retail and institutional investors should accept that Bitcoin is a complex investment and highly volatile. One must carefully consider the potential downside risks of any allocation. As a rule of thumb, if you find terms like “blockchain”, “white paper” and “halving event” intimidating, your knowledge and experience are likely not sufficient, and the investment may not be suitable for you.

The author cannot deny the spectacular return Bitcoin has shown. At the time of this article, Bitcoin is trading near all-time highs at around $34,000, after returning 50% in December 2020. However, there is no such thing as a “free lunch”, and as put by Hull “if a deal sounds too good to be true, it probably is”. This return is compensation for a tremendous amount of risk. While this statement may seem obvious, ignoring risks associated with a greater promised return was the root of the 2007 financial crisis, and empirically, Bitcoin has yet to act as a reliable, safe haven.

Daniel de Kock

Chartered Wealth Manager

This publication is for academic purposes and does not constitute a personal recommendation or investment advice or an offer to buy/sell or an invitation to buy/sell securities referred to. The information and any opinions have been obtained from or are based on sources believed to be reliable, but accuracy cannot be guaranteed. No responsibility can be accepted for any consequential loss arising from the use of this information. The information is expressed at its date. Past performance is not a reliable indicator of future returns.


[1] Is Bitcoin a hedge or safe haven for currencies? An intraday analysis - ScienceDirect

[2] Bitcoin Whales’ Ownership Concentration Is Rising During Rally - Bloomberg

[3] Safe haven or risky hazard? Bitcoin during the Covid-19 bear market - ScienceDirect

[4] Increased Correlation in Bear Markets: Financial Analysts Journal: Vol 58, No 1 (tandfonline.com)

[5] Bitcoin is not the New Gold – A comparison of volatility, correlation, and portfolio performance - ScienceDirect

[6] D Kahneman and A Tversky, Prospect Theory: An Analysis of Decision Under Risk, Econometrica, vol. 47, no. 2, pp. 263-291, March 1979.

[7] 148.pdf (adelaide.edu.au)


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