UBS Group's latest report: Four reasons why Bitcoin cannot be a safe-haven asset

In an era of zero interest rates and amid the crisis of currency inflation, does Bitcoin have the ability to become the ultimate safe-haven asset? The Swiss banking giant UBS seems to disagree with this view and has put forward four reasons explaining why Bitcoin is not considered a hedge asset.

Can Bitcoin Hedge Against Inflation?

Since May this year, the US dollar index has been declining, prompting many institutions or Wall Street investors to suggest transferring assets from the US dollar to safe-haven assets such as precious metals and bonds. For MicroStrategy, the best choice for a hedge asset is Bitcoin. According to previous reports, the Nasdaq-listed company MicroStrategy announced on August 11th that it decided to invest the remaining $250 million on its balance sheet entirely into Bitcoin, in addition to the funds previously invested, the company has purchased a total of 38,250 Bitcoins (worth a total of $425 million).

MicroStrategy claims that this move is a hedge against inflation, but Swiss banking giant UBS seems to disagree. According to a report by Decrypt,UBS doubts that Bitcoin is a safe-haven asset, the Swiss bank not only holds a skeptical view on whether Bitcoin is a safe-haven asset, but also further points out that such assets are difficult to maintain during economic crises, and may even increase in value.

UBS stated in the report:

"Given the high volatility and historical drawdowns of cryptocurrencies, they may be attractive to speculative investors, but they are neither a suitable substitute for safe-haven assets nor necessarily help with portfolio diversification."

UBS experts claim that several financial indicators observed during the COVID-19 outbreak can prove this analysis to be correct. Due to the unprecedented surge in liquidity demand, the correlation between Bitcoin and traditional assets is increasing, leading UBS to cast doubt on Bitcoin's ability to serve as a safe-haven asset.

Four Reasons Why Bitcoin May Not Hedge Against Inflation

UBS presented four different reasons in the report to explain why Bitcoin may not be a safe-haven asset.

The first reason is the extreme price volatility, which poses high risks for most investors. The report claims that while traders or speculative investors may be interested in such price fluctuations, for conservative investors, poor timing of entry could lead to severe capital losses.

The second reason is insufficient understanding of fundamentals, as investors tend to focus on successful cryptocurrencies rather than failed ones, resulting in a loss of ability to discern the value of tokens.

The lack of stable cash flow is the third reason. Due to the lack of stable cash flow returns, the timing of investments in cryptocurrencies becomes crucial. The report states:

"Risk assets usually suffer significant losses, and without fixed cash flows, it is easy to incur permanent wealth loss."

The last point is the limited diversification of Bitcoin in portfolios. The report points out that due to the historically low correlation between Bitcoin and other asset classes, it helps to enhance portfolio diversity. However, this year the correlation has increased significantly, indicating that Bitcoin may now not be suitable as a hedging tool for asset classes outside the portfolio.