Bitcoin and the Flight to Safe Haven Assets

One of the arguments for long term investment in Bitcoin is that it is a safe haven in times of social, political, financial, and military turmoil. If that is true, why is it that when Iran attacked Israel with a barrage of 350 drones, cruise missiles, and ballistic missiles, that Bitcoin fell while the US dollar went up against other currencies? For decades the US dollar was considered the optimal safe haven asset. This was the case despite the horrific inflation of the 1970s and lower level but steady inflation over the decades since. The most recent threat to the position of the US dollar as the ultimate safe haven currency is the recurring circus in Washington as Congress repeatedly comes close to closing down the government as they fight over the debt ceiling. Thus we have the argument for owning Bitcoin despite losses in times of turmoil. What should Bitcoin investors think in terms of Bitcoin and the flight to safe haven assets?

Covid Crash and a Lesson for Bitcoin Traders

Folks who are day trading Bitcoin, or any asset for that matter, need to pay attention to what is going on in the world and not just technical analysis signals on their trade station screen. An example that we like to cite is when the stock market was happily going up to all-time highs in early 2020. At the same time a viral plague was shutting down multimillion-person cities in China and the ash in the air from crematoriums working overtime was visible from satellites in space. Anyone who was paying attention to what was going on in the world was able to pivot their trading and investing accordingly when the Covid-19 pandemic and crash hit the world full force. Those who were still trapped in the pretend world of “stocks always go up” lost everything. During the same time frame Bitcoin also lost about 40% of its value as markets everywhere crashed and the “Bitcoin always goes up” folks took a hit as well.

Iranian Rockets and a Flight to Safe Haven Assets

War and the threat of war in the Middle East is nothing new. What is new is that governments across the region are tired of war. They want peace and they want the kind of prosperity that comes from peace with one’s neighbors. The outlier to this is Iran which finances terrorist groups throughout the region to act as its proxies. Iran had always refrained from making any direct attacks on Israel from its own soil, rather relying on Hezbollah, Hamas, or the Houthi in Yemen to do their work for them. That changed after Israel (probably) sent jets to bomb a building adjacent to the Iranian embassy in Damascus. The Iranians say it was a consulate building. Israel says it was a military facility of the Iranian Quds force and its attack killed three Iranian generals as well as other high-ranking Quds officers. In response, Iran attacked Israel directly from its own soil for the first time. The response in the financial world was that folks bought dollars, sold Bitcoin, and briefly shorted oil futures while buying oil stocks until it became clear that Israel was not going to immediately respond in kind to Iran’s attack.

What Caused Bitcoin to Fall in Early April 2024?

On April 12, 2024 Bitcoin was cruising along at $70,918 when Iran began launching drones, cruise missiles, and then ballistic missiles toward Israel. Seven hours later it traded at $66,448. The following evening at 9 pm it fell as low as $61,709 before coming back to the $65,000 range. It would appear that two things were going on. One is that traders realized that the situation in the Middle East was serious and could, in fact, lead to a wider war. Second, traders with bullish positions were forced to liquidate bullish bets in the face of an assault of fundamentals on their technical-based positions. It is currently unclear what happens next with Israel and Iran but what is clear regarding Bitcoin is that it did not act like a safe haven asset as war threatened in the Middle East. The US dollar, however, went up against the euro, British pound and yen.

Technical Signals Versus Fundamentals in Bitcoin Day Trading

Almost all of the time, day trading of cryptocurrencies, as well as stocks, currencies, futures, or options, is a game of technical analysis and market sentiment. The back and forth fluctuations in the market are driven by short term sentiment and traders trying to outguess one another. That is how it goes every trading day until suddenly that is not how it works. We cited the Covid crash as one example and Iran’s attack on Israel is now another. One of the rules that many day traders follow is to get in and out of trades quickly. Set reasonable price targets and be happy with repeated small profits. Within this sort of gameplan a trader can generally function without undue concern about market fundamentals regarding things going on in the wider world. To the extent that a trader holds positions for hours instead of minutes, holds them past the end of a trading session, or holds them for a week or more, it is essential to have a clear sense of what a change in fundamentals (like an all-out war in the Middle East) could have on the asset you are trading. And, in the case of Bitcoin, it is useful to remember that it generally does not act like a safe haven asset in times of turmoil. In regard to technical signals, it is useful to remember that that the large amount of Bitcoin wash trading distorts the market and has the potential to make otherwise accurate technical signals misleading.

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