Will investors flee to bitcoin in times of distress?


With financial markets currently watching the turmoil in the European banking system, and with Deutsche Bank’s problems to the fore, does bitcoin provide the safety investors require in times of distress?

According to a recent CoinDesk feature, any ratcheting up of the current problems in the financial may prove a boost for the digital currency as investors reject traditional fiat currencies.

“The capital markets have awakened to bitcoin as a disaster hedge,” writes analyst Chris Burniske, blockchain products lead for investment manager ARK Invest.

“The digital currency doesn’t correlate with other asset classes, an aspect that may make it more attractive in times of uncertainty,” wrote Burniske, adding,

“Depending on how people feel about Deutsche Bank’s future prospects, they may choose to hedge themselves from the more traditional markets by using bitcoin.”

But are investors truly ready to use crypto-currencies, including Bitcoin, as a hedge against global systemic contagion when the sector has itself had a few high-profile problems.

In June this year, ethereum start-up company DAO announced that it had been hacked and around $55 million worth of ethers were stolen, sending the price spinning lower. A sharp sell-off was also seen in big-brother rival bitcoin with charts showing losses of around $100 per coin.

Bitcoin price since September 2014


And in August this year, the price of bitcoin fell sharply after Hong Kong-based exchange Bitfinex said that it had discovered that nearly 120,000 bitcoins, worth around $65 million, had been stolen.

Another risk for bitcoin holders, compared to traditional banking is the fact there is no depositor’s insurance to absorb the loss, even though many exchanges act like virtual banks.

A recent Reuters article on the cyber-security threat to crypto-currency exchanges highlighted that not only does that approach cast the cybersecurity risk in stark relief, “but it also exposes the fact that bitcoin investors have little choice but to do business with undercapitalized exchanges that may not have the capital buffer to absorb these losses the way a traditional and regulated bank or exchange would.”

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Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. The information does not constitute investment advice or an offer to invest.