As it became clear late yesterday and into Friday morning that Britain was indeed voting to leave the European Union, the Bitcoin price got a very clear boost.
In the six hours or so from when the results started to trickle in (about 7 p.m. EDT) until it was obvious that the Brexit had become a reality, the Bitcoin price spiked about 8.8%, jumping from about $625 to nearly $680. Today, the price of Bitcoin has fallen back to about $650.
This roughly mirrored the surge in gold, which rose as much as 8% before retreating somewhat.
That the Bitcoin price behaved much like gold in response to the Brexit news should not be surprising, but that kind of correlation actually has been rare.
TradeBlock, a web-based cryptocurrency data provider, analyzed the one-year correlation of gold and Bitcoin at the end of January. TradeBlock found that Bitcoin had a pronounced inverse relationship with gold – not what you'd expect from two "safe-haven" investments.
The correlation coefficient was -0.70. Correlation coefficients are measured on a scale from 1.0 to -1.0, so -0.70 means that the price of gold and the price of Bitcoin mostly moved in opposite directions.
That's probably because the financial world has been slow to accept Bitcoin as a safe haven in the tradition of precious metals like gold and silver. After all, Bitcoin has only been around since 2009, while gold has served as a store of value for thousands of years.
But that's been changing…
Why the Bitcoin Price Behaved More Like Gold This Time
The global financial community has come around to viewing Bitcoin as a transformational technology, and not so much a tech novelty, so the next logical step is for it to be thought of as a kind of "digital gold."
"This is Bitcoin's coming out party as a global safe-haven investment. Amazing," tweeted Barry Silbert, founder and CEO of the Digital Currency Group and the creator of the Bitcoin Investment Trust.
This idea isn't new to the Bitcoin community, but until now we haven't really seen it manifest in the Bitcoin price.
"Changes in investor psychology about safe havens, at the margin, will make an impact on the Bitcoin market," said Darin Stanchfield, CEO of Bitcoin hardware wallet KeepKey. "This starts a feedback loop, where investors see how prior events affected the Bitcoin price and decide to seek some exposure to Bitcoin, which in turns drives up its price. We saw early signs of this back in 2013 during the fear of a U.S. government shutdown, and then again last summer during the Greek bailout referendum. Over time, perception becomes reality."
For investors, this means Bitcoin has become one more alternative to traditional safe-haven assets such as gold, silver, and U.S. Treasuries.
Why Bitcoin Is an Excellent Safe Haven
Bitcoin is ideal protection from the destructive policies of central banks and fiat currencies that continue to lose value.
"People may be waking up to the realities of fiat currencies and debt economies," said Ned Scott, CEO of Steemit, a social media platform built around the Steem cryptocurrency. "Centralized, debt-based economies and their currencies come with risks, such as bail-ins and bail-outs, that digital currencies protect consumers from."
And as the Brexit vote has demonstrated, Bitcoin also offers protection from black swan events.
Of course, investors shouldn't go overboard. Most experts recommend holdings in gold, for example, at about 5%, and certainly less than 10%.
If you choose to add Bitcoin to your portfolio, it should be no more than 5%. While it has many of the advantages of gold, Bitcoin is much more volatile, and so more risky.
How to Invest in Bitcoin: Beyond its utility as a safe haven, Bitcoin has proven itself a remarkable investment, with a compound annual growth rate of more than 80% over the past three years. To find out how to add this "digital gold" to your portfolio, check out this Money Morning Guide to How to Buy Bitcoins…