• Viewnodes

Bitcoin as a safe haven asset: Introducing a debate series

This is the first in an article series on the idea of Bitcoin as a safe haven store of value: the notion that Bitcoin is a tool with which one can hedge against loss in the traditional financial markets (stocks, funds and so on), because the crypto market does not act in line with those markets. This is a long established theory, and even academics have been engaged in discussions on the accuracy of this claim. Viewnodes will examine the two sides in this debate, while this article will set the stage by defining a safe haven asset, in the context of more established examples of that notion.

What is a safe haven asset?

Given the close correlation in price between bonds, stocks and funds, investors regularly seek the best opportunities to diversify their assets to ensure a correction or crash in these markets does not prove entirely disastrous to their portfolio, and potentially even profit from the event when others follow suit. There are numerous assets which have been considered to fit this description, most notably precious metals, treasury bills and cash — in the native currency or a foreign currency (often the Swiss franc). These are all considered low in risk, and potentially act as life rafts when traditional markets sink.

The gold standard of safe havens

Gold has proven a very successful safe haven asset, and has even seen a very rough inverse correlation with traditional markets. As we see in this graph, gold prices underwent an enormous surge from 2007, when traditional markets began struggling, until late 2013 when the financial crisis had subsided and the processes of recovery had begun. From this point on, the traditional financial market in the United States saw a tremendous rally and in turn gold declined sharply. Having a relatively small supply increase of about 2% per year and good trading volume, this has all combined to make gold a strong asset for diversification during tumultuous market periods.

Digital gold?

Several high-profile individuals, Peter Thiel being one example, have forwarded the belief that Bitcoin is effectively online gold. This is based on the idea that bitcoin has a limited supply, with very low and ever decreasing rates of inflation. Of course, and as we have touched on before, Bitcoin will eventually be deflationary as more will be lost on a daily basis than created. In that regard, Bitcoin certainly has a superior scarcity factor to gold, and indeed it’s all-time high is more than ten times that of gold per ounce ($19,600 vs $1,890). This has led to speculation that Bitcoin might similarly act as a hedge against traditional markets in the same way gold has.

How fair is that comparison? Viewnodes will debate exactly that, providing arguments for and against the argument that Bitcoin is a safe haven asset, in a similar vein as gold has been. Check back or follow us for the next instalment, arguments in favour of the argument, next week.

Article by Byron Murphy. For information on some of the services provided by Viewnodes, including our Tezos delegate, click here.

Medium Link: