Bitcoin: what happened?! It's sinking!

History has always said that Bitcoin was the digital equivalent of gold. It served as a refuge in times of trouble. Last week, Bitcoin fell by almost 49% as the now global virus panic seeped into the crypto markets on the day the ECB was trying to ease market tensions. The Bitcoin, which started the week at $8,299, fell to $3,769 on Thursday. Why? How? Why didn't the Bitcoin rise in the midst of the panic in the stock and money markets? To understand the reasons, we must understand the concept of "safe havens".

What is a "Safe Haven", financially speaking?

A safe haven in  trading is often seen as the refuge that investors and traders use to protect themselves from uncertainty. This uncertainty can be related to political issues, social tensions, economic influences and even technological innovations or a lack thereof. Recent market uncertainty has been more of a health and social factor, with WHO now classifying COVID-10 as a global pandemic. Prior to the announcement, markets were already under stress, with resales in most national index markets, such as the S&P index in the United States. So, with these markets down, was anything up?

Safe havens are considered independent of the market and offer clients the peace of mind of knowing that they have stood the test of time. Gold is seen as the flagship safe haven because it was the medium of exchange before the FIAT monetary system and the introduction of centralised banking systems.

The metal therefore inspires a certain level of confidence in traders only when all else fails. We still have the basis of gold, and this commodity can hedge the risks of the money markets. What about digital gold, namely, the Bitcoin?

Bitcoins are still a relatively new. They have not yet gained the full support of traders who believe they can protect their investments from any downturn. At this point, Bitcoin seems to act more as an attractive asset than a necessity. Only its main supporters still believe in its potential outside the crisis.

So, getting back to the 49% drop, without perhaps yet achieving safe haven status, another attraction of the Bitcoin was the volatile nature of its movements. However, now that we are seeing that the volatility levels in traditional markets are higher than in this one, the volume of trading has remained in the money markets, while those that are trading bitcoins with diversification in mind, are selling their positions to find opportunities elsewhere.

One of the opportunities created has been the recent response of central banks around the world, which have put in place fiscal policies to give the markets some breathing space. The ECB has announced that it will support the line of credit to European banks, which could see their borrowing fall and consumer spending decline in this period of panic. However, the markets are not too impressed by this news, leading to calls for further action.