Bitcoin as a safe haven asset: the case for
Updated: Aug 6, 2019
Last week we introduced a debate series on the categorization of Bitcoin as a safe haven asset — an asset which can be used as a hedge against the traditional market of stocks, funds, bonds and so on. Here is the second part of this series, consisting of five arguments for the classification of Bitcoin as a safe haven or “hedging” asset.
1. Correlations between Bitcoin and traditional markets are spurious
The first issue we bump into is that the evidence for or against the argument of this series is extremely sparse. We have seen less than ten years of Bitcoin circulating on exchanges, and for the bulk of that time the traditional market (at least in the Western world) has been staging a recovery, until 2016 when the United States’ traditional economy began a significant rally to all manner of all-time-highs. The graphs will show, if we overlap them, that both have undergone considerable growth since 2010, and this is often used as a refutation to Bitcoin’s potential as a safe haven store of value. If we actually look at the scales involved, however, it’s clear that no real correlation exists.
The S&P 500, for example, recovered from a low point of 676 in 2009 to a high of 2,940 in September 2018 — a growth of 430%. From the time it began trading in the summer of 2010, Bitcoin began around $0.008 and famously peaked at just under $20,000. Given the immediate and then prolonged crash from this peak, let’s take the 2018 and 2019 lows of $3,400 as a reference point instead. In less than ten years, Bitcoin’s value grew by 42,500,000%. The magnitude of such a number is precisely why gains in crypto are measured in “x”, instead of “%”. To suggest there can be any correlation between such a growth and that of any other asset class, let aside low-risk traditional investments, is patently absurd. This is why much cherry-picking and graph-flattening is used to detract from the classification of Bitcoin as a safe haven. That is also why the remaining points here will have nothing to do with weekly or monthly charts, but all to do with the nature of the asset itself and the ways in which it is traded.
2. Bitcoin trading is global and around the clock
Anybody with an internet connection can purchase Bitcoin in minutes on an exchange or OTC platform like localbitcoins, at any time of the day. It is used by people living under strict capital controls, and nobody can seize these assets or freeze them should they run afoul of authorities. Barriers exist between users and fiat on/off ramps, but there is always a workaround (selling in cash, for instance). In summary — Bitcoin trading is completely global and constant, as anyone trying to sleep while refreshing their portfolio apps will testify.
By comparison, traditional assets including stocks, bonds and funds have trading hours similar to bank opening hours, trading is closed on weekends and national stock markets can have additional barriers for non-citizens, requiring the need for specific brokerages. The main exception to all of this is Forex trading, which is also borderless and occurs 24/7. This is not ruinous or even deleterious to the point being made, however, as foreign currencies can and do serve as safe haven assets — most notably the Swiss franc.
3. Bitcoin is quite scarce
We posted an article a while back which shows how Bitcoin will eventually become deflationary — eventually more will be lost on a daily basis than mined. This is notable, particularly because Bitcoin is already rare and inflation is low — about 1% per year until 2020, when it will fall to 0.5%. Scarcity is often touted as a desirable characteristic of safe havens, and a slightly deflationary currency means value isn’t lost to supply increases. The supply increase of Bitcoin is already much lower than gold, which hovers around 2%
4. It is not centrally controlled
Decentralized cryptocurrencies are part of a rare asset class which do not rely on centralized decision makers, and the value of Bitcoin is not dependent on a certain country’s economy performing well, strength in a particular market sector or even predictable economic conditions. In that capacity it functions somewhat similarly to gold, which is mined principally in Africa, Asia, Russia, Australia and the Caribbean, but gold mining industries do exist in other locations as well. Bitcoin is most commonly mined in colder regions with low electricity costs, but mining of some level happens all of the world. This makes it resilient to turbulence within any specific market and quickly adaptable if any specific region becomes unsuitable for mining or trading. No one person or large group can independently make changes to Bitcoin’s consensus model, which is quite distinct from traditional financial products.
5. Bitcoin has other functions besides acting as a store of value
Aside from an asset prone to speculation and the potential of gains relative to fiat currency, Bitcoin is also used for a wide variety of transactions. While adoption for real world purchases remains rare, BTC absolutely is used for entry to ICOs and token sales, purchasing altcoins on exchanges, paying exchange listing fees and for paying ‘bounties’ to freelance developers. Bitcoin can also serve as an alternative to the remittance market, as it offers the same function for vastly lower fees. The need for these functions affects the circulating supply and the correlated demand.
No challenge to gold, but that’s not the question
You will find articles by any number of analysts adamant that Bitcoin will never replace gold as the go-to safe haven asset. They rightly point to several advantages gold has over Bitcoin in this regard, although of course some of these could change as time progresses — volume for instance, as measured by how much of the total supply is traded daily. This is 3% for gold, as compared to 0.5% for Bitcoin. Gold also has obvious additional uses in the jewellery and technology markets, where as speculation remains the bulk of Bitcoin’s use case. Both of these are true, and very unlikely to change any time soon.
However, the fact that such an argument needs to be made is already telling. Gold is not the only safe haven asset, and no assertion that Bitcoin will overtake gold in its role can be used to discredit BTC as a hedging asset in itself. Safe haven assets by definition are those which do not trade in line with traditional markets — stocks, funds, bonds and so on. Bitcoin has met that definition to date, as it hasn’t traded in line with any traditional market, for better or worse, and has no attachments to any location or organization. The case for Bitcoin as a safe haven asset does indeed have merit, even if the past year has not made it a particularly successful one.
Article by Byron Murphy, Editor at Viewnodes. Viewnodes helps clients establish and maintain masternodes for the currencies which currently support them. To contact us for information on our masternode services, please submit this contact form.