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Safe Haven or safe investment in the financial market is a type of investment that increases or preserves assets in times of market turmoil. In fact, in some cases, economic turmoil has caused stagnation and collapse of the financial market, investors prefer to take their capital where they will have the least loss. Safe Haven, financial shelters or investors’ safe shelter in times of crisis, are investments that not only preserve the value of our property but also can be profitable in times of crisis.
Investors use safe haven or safe assets to limit their losses in turbulent economic conditions. However, the assets designated as Safe Haven may vary based on the specific nature of the market.
Therefore, investors should use due diligence when determining the appropriate safe haven based on their needs. Precious metals such as gold, stocks, and currencies are some examples of safe haven investments. Now, according to the concept of Safe Haven, you might be wondering if cryptocurrencies, especially Bitcoin, can be known as Safe Haven? For the answer to this question and more explanations about the concept of safe assets or safe investment, stay with me in the rest of this article.
What is Safe Haven for investors?
Safe Haven or safe investment are a type of asset and investment that can act as a safe haven for traders and investors when the world faces a crisis. In fact, safe investments will protect your assets against market fluctuations.
Investors use safe assets to limit their losses in economic downturns. These investments not only maintain their value in the turmoil of the market, but may also cause an increase in value.
Safe havens or safe investment can be different investments.
Gold is one of these investments. As you know, the price of gold increases with economic recession and market collapse. In times of crisis and recession, investors turn to safe havens like gold. On the contrary, this is also the case when the markets are bullish and prosperous and the economic situation is good, and in this situation the price of gold decreases. Because investors are relieved from the economic record and sell their gold and buy stocks again.
What is the purpose of safe investment?
Safe investment has the possibility of diversifying the investors’ portfolio and this can be profitable during market fluctuations. Most of the time, the rise and fall of the market is for a short period of time. However, during economic downturns, market downturns can be prolonged. In market turmoil, the value of many investments can decline. When these systemic events occur, some investors seek to buy safe haven assets that are either uncorrelated or negatively correlated with the market in times of distress. While the value of the assets is decreasing, the value of the safe haven of the investors is either maintained or increased.
However, what appears to be a safe investment in one bear market may be considered a disastrous investment in another. Therefore, the evaluation of safe investment is different and requires sufficient accuracy from the investors.
Safe Haven or safe investment are assets that will reduce losses and even increase investors’ profits in times of crisis. Some safe investment havens include gold, defense stocks, bonds, precious metals and treasury bills (T-Bills) etc. are.
Some examples of safe assets are the Swiss franc, the Japanese yen, and the US dollar due to the stability of the Swiss government and its financial system.
Advantages and characteristics of safe assets
Now that you are familiar with the concept of Safe Haven or financial shelters, it is better to know some of their features and benefits:
High liquidity
Safe havens usually have high liquidity and you can enter or exit the market at almost any price without experiencing slippage.
In fact, one of the goals of safe investment is that in times of crisis, war, and unrest, they can be easily and quickly converted into cash. For example, GBPJPY is a safe currency pair with high liquidity, which can be easily entered and sold at any price during times of stress and crisis.
Capital protection
Another advantage of Safe Haven assets is that it protects your capital in times of crisis and unrest. Due to the importance of this issue, all investors and traders prefer Safe Haven to prevent the destruction of their capital.
A lot of variety
One of the important points about Safe Havens is that these assets, which act as a safe haven for investors, are highly diversified. For example, you can choose gold in the commodities or goods market, or in the currency market, the US dollar is one of the best safe assets.
Limited supply
If the supply of the asset can outstrip the demand for it, you will probably face a decrease in its value. Markets such as gold that are in short supply will increase in value at this time. This feature can also be generalized in the case of Bitcoin digital currency; Because with the decrease in the supply of Bitcoin and the increase in demand or during the Bitcoin halving event, we will see an increase in the price of Bitcoin.
Stable demand
A safe haven asset or safe investment should also be in demand in the future. Therefore, one should also pay attention to the future usefulness of that asset. For example, some commodities such as silver, although they have a wide industrial application, may be replaced by other commodities in the future.
Durability
Assets whose quality declines over time will also result in a decrease in utility, and their demand is likely to be lower in the future.
Read more: Bitcoin price depends on what factors?!
A variety of Safe Haven samples
Investors often choose assets such as currency pairs, defensive commodities and stocks, treasury bonds, etc. in crisis situations. They do it in order not to lose their capital. In the following, I will mention some safe haven investments in the financial market:
Gold is a safe investment
Gold is considered one of the most significant and valuable safe goods and a safe investment, which historically has been able to show a reliable negative correlation with stocks. In fact, gold has been used as a store of value for many years. As a physical commodity, gold cannot be printed and supplied in large quantities, and even its value will not be affected by interest rate decisions made by governments. This product is a kind of insurance against adverse economic events, and during inflation, its price is depreciated in US dollars. Therefore, it can be considered a kind of Safe Haven due to maintaining its value in the long term.
Treasury bonds
Treasury bonds (T-Bills) are considered a safe haven or safe investment, even in the economic turmoil, due to the support of the US government and its officials. In addition, American treasury bonds are considered a risk-free investment, which will be returned to you by the American government during liquidation and maturities.
Defensive stocks from the safe investment example
Regardless of the market situation, consumers continue to buy health products, food and medicine in times of crisis and chaos. they continue Therefore, companies of this kind of services maintain their value in times of crisis due to the increase in demand for their goods. For example, during the Corona Pandemic, Pfizer Company’s stock increased a lot after the invention of the anti-Corona vaccine, and its shareholders had a lot of profit.
International currencies
In the forex market, there are also currencies that can be considered safe havens in times of unrest and wars. Swiss franc currency is one of these currencies which is considered as a safe haven for investors. Due to the stability of the Swiss government and its financial system, the Swiss franc usually faces upward pressure due to increased foreign demand. In fact, Switzerland has a large banking industry, low unemployment, stable and safe, high standard of living, low volatility market and positive trade balance figures. In addition, Switzerland’s independence from the European Union has protected this country from negative economic and political events in the region. The Japanese yen and the US dollar are also considered safe havens.
Because the US dollar is a global currency and is used in many international business transactions, it can be a safe haven for investors and companies that face uncertainty about the domestic currency. Japanese yen is considered a safe haven in times of crisis due to very low inflation, high liquidity and stability of the economic and political system.
Digital currency is a safe investment example
Some digital currencies can be considered as safe havens for investors. In volatile markets, currency traders and investors may turn to converting their liquid assets into such currencies for protection.
Can cryptocurrencies be a new safe haven for investment?
When markets fall more broadly, many investors turn to safe havens such as precious metals and scrap bonds. For centuries, gold has been presented as a safe haven for investors. However, in the last five years, digital currencies have gained tremendous popularity. Digital currencies are not dependent on any macro-economic factor, center or government institution and are often known as decentralized. In the market decline, there were discussions about Bitcoin versus gold as a safer haven.
The total value of the global cryptocurrency market is currently estimated at 1.95 trillion dollars. Also, 52.47% of the total cryptocurrency market is owned by Bitcoin.
In a more straightforward answer to the question, can cryptocurrencies, especially Bitcoin, act as a safe haven in the investment world? It can be said that it is still too early to say with certainty that cryptocurrencies can be used as a safe haven for investment.
Cryptocurrencies are still in their infancy and not yet mature enough to speak with certainty. But the good news is that evidence shows that cryptos are gradually gaining attention from investors, which raises the potential for Bitcoin to become a strong safe haven.
Being a safe haven for cryptocurrencies
As we said, it is still too early to definitively declare that cryptocurrencies are safe havens. But in the case of gold and precious metals, this is not true; Because since the past, gold and silver have been used as safe havens all over the world.
But this cannot be said with certainty about cryptocurrencies. For two reasons, it is not possible to talk with certainty about cryptos being a safe haven:
- The infancy of cryptos and blockchain technology
- The low market gap of cryptos compared to other assets
But the good news is that cryptos played the role of Safe Haven well in the bad conditions of the financial market and the economic crises caused by the corona virus, which led to the market crash. Although at the beginning of the market crash, the crypto market fell by around 40%. But it quickly regrouped and proudly operated as a safe haven for its investors without government support. In general, he got a passing grade in the test of being a safe haven for markets.
An example of digital currencies as a safe haven in the United States
According to Cathy Wood, CEO of asset management company ARK Invest, digital currencies have been able to emerge as a safe haven amid the ongoing banking crisis in the United States.
Varud, criticizing the inability of the Federal Reserve to prevent banks from fleeing, considered the failure of their policies as a factor for the current crisis; which has caused the downfall of banks such as Signature and Silicon Valley Bank (SVB). Cathy Wood tweeted on March 16 that asset mismatches are common for banks. But in the current scenario, it was considered indefensible. They believed that the current financial crisis was not forced by cryptocurrency.
Because the ecosystem from the fall of FTX due to heavy monitoring caused severe regulatory repression. He argued that regulators are using cryptocurrencies as scapegoats for their breaches in traditional banking oversight.
Kathy Wood has long been known as one of the supporters of digital currencies. He envisioned cryptocurrency as a solution to the main points of opacity, failure and regulatory errors in the traditional financial system. According to this person, the current banking crisis was not possible in the network of transparent, decentralized and auditable crypto assets and more than the collateral. In the midst of the US banking crisis, digital currencies were able to reach their highest levels in several months and were hailed as safe havens with the increase in the price of Bitcoin and Ether. As traditional banking continues to struggle, it’s clear that cryptocurrencies will play an important role in the future financial landscape.
How to trade Safe Haven
As you know, the financial market operates in a cyclical manner. To be profitable, traders should look at trends such as dividend stocks, industrial commodities, the US dollar index, as well as key factors such as GDP growth and employment data to understand how the economy is doing.
Examining economic cycles provides an idea of what to buy during crises and recessions, or when to convert a portion of the portfolio into safer and more defensive assets. For example, below are three important components that can be signaled before recession:
Inversion of the bond yield curve
The inversion of the bond yield curve means that the interest rate of 10-year bonds will be lower than that of short-term bonds. This is a signal for the beginning of recession.
Negative employment statistics
Employment statistics provide insight into employment intentions and the number of hours worked. Reducing the working hours of companies or hiring temporary workers shows a negative view of the economic situation.
Poor information about businesses and consumers
If businesses and consumers are not sure about the future of the economy, the possibility of investing and spending for the future will be less and this factor will cause a contraction in growth and create a recession.
How to trade safe haven or safe haven
After getting acquainted with the three important components of economic recession, it is better to deal with how to trade safe assets or safe investments.
Attention to economic news and important fundamental events
Factors related to fundamental analysis, such as employment statistics, business confidence index, provide the possibility of predicting market stagnation and economic prosperity in the same way. Therefore, paying attention to the fundamental factors as much as possible will give you good criteria for entering and exiting a Safe Haven on time.
Attention to technical indicators
Like trading other financial assets, you can find out the time to enter and exit the market by using technical analysis and available tools such as trend lines and indicators. For example, the relative strength indicator (RSI) shows you when an asset has entered the overbought or oversold zone. In general, the simultaneous use of technical and fundamental analysis will give a more accurate picture before the Safe Haven trade.
Attention to price action records
Paying attention to price action is very important for the best Safe Haven trading method; To that end, from a historical point of view, there are times when an asset has shown similar behavior. For example, in 2008, with the beginning of the financial crisis, an increase in gold was expected, but instead, the reserves were liquidated by the banks in favor of the dollar, and only the year after that, the market rose.
Read more: Fundamental analysis
At times when the future becomes unclear for investors, risk aversion flows begin. This means that all traders sell their risky assets at the first opportunity to escape from risk and invest in safe assets. Therefore, with the fall of risky assets and the start of risky flows, Safe Haven or safe currencies are strengthened.
These assets provide a more stable investment during times of market turmoil. Safe havens have performed well throughout the year and are not expected to be severely affected in a financial market crash. Having a combination of Safe Haven with safe investment along with risky assets such as crude oil, growth stocks, etc. It can help prevent financial risk and adjust risk.
