Bitcoin: A Safe Haven?
Anyone familiar with Bitcoin or cryptocurrencies must have at least once come across the phrase, Bitcoin is a safe haven asset. It has been used by anyone from experts, influencers, to even someone who blindly believes in cryptocurrency. However, that will not be the only opinion you must have heard, like every coin which has two sides, some people argue that Bitcoin is not a safe haven. So, which one is it?
Safe Haven Asset
Before exploring whether Bitcoin is a safe haven or not, let’s understand what a safe haven asset is.
A safe haven asset is usually a term used in the traditional markets and, by definition, it is all those assets or investments that would retain or appreciate its value during a tumult market. You would want to invest or hold on to a safe haven asset when the market is turbulent, much like the current market. Because once the dust settles and the economies are back to normal, it is highly probable that you have gained a profit on such investments.
In traditional markets, Gold is one of the safe haven assets. The reason is primarily owed to the rise of its value during the various market turmoils of the past, and even now, Gold continues to appreciate in value.
Gold is just an example of a safe haven asset, and there are numerous other assets as well, which falls under this category. However, Gold is arguably the best among those.
There are no specific properties that enable an asset to be in the safe haven category, but three of the most important attributes that made Gold a safe haven asset is:
Gold is one of the rarest metals known to man. Moreover, its extraction and processing require a lot of time and effort, making it even more challenging to acquire. Also, the production of Gold cannot be easily increased with increased demand.
Secondly, Gold is a metal found in almost every electronic device, and it has a variety of applications in other industries as well.
Lastly, Gold is an asset recognized as a store of wealth. The intrinsic value of almost all the fiat currencies is a direct result of their gold reserves.
These attributes of Gold have significantly increased its demand and have effectively raised its value over the years.
Now in this same context, let’s see how Bitcoin fares:
Bitcoin is also a scarce asset; it is limited in quantity as the total number of Bitcoins that can ever be mined is capped at 21 million. Moreover, the supply of Bitcoin is decreasing over time through a mechanism called Block Halving. Block halving is a property of the Bitcoin network, which occurs every four years that reduces the number of daily mined Bitcoin by 50%.
When the Bitcoin network came into existence, ~7200 Bitcoins were mined per day. The first block halving in 2012, reduced the number to ~3600 per day. In 2016 this was further reduced to ~1800 - the current daily quantity of Bitcoin that is being mined. The third halving is scheduled in May of this year, after which it will be reduced to 900 per day.
This reduction of supply is instilled in the software code of Bitcoin and cannot be tampered with, guaranteeing that the daily mined Bitcoin count will reduce over time.
Contrary to Gold, Bitcoin is only used in the Cryptocurrency market, and it has very few applications outside the crypto ecosphere. Although Bitcoin was invented to be used as a digital currency, it has not been entirely successful in that manner. Longer transaction time has not made it easy to use Bitcoin as a payment method. Although recent improvements to its code have enabled faster transactions, using Bitcoin as a payment method is still not a viable solution.
Though Bitcoin is not yet recognized as a payment method, many believe that it is in a path of transition from digital currency to a store of value, tempting them to call it digital Gold. However, apart from speculations, there is no concrete evidence to back the claim that a country or government agencies have invested in Bitcoin, believing it to be a store of value.
To conclude, Bitcoin as an asset class is still in its early days, as it is just over a decade old compared to Gold, which has been in the market for many decades.
The prime reason an asset is classified as a safe haven is when its value appreciates with time and, for that matter, Bitcoin has outperformed almost every other asset in the market. However, Bitcoin’s utilization outside of crypto markets is still limited, adding to it the complexity of its underlying technology makes it even more perplexing for an average person to use it in a day to day manner. Although Bitcoin does not exhibit all the properties of a traditional safe haven asset, it does bring some innovative properties like security and decentralization, which may well be more valued in the coming years.
As an asset class that was invented during the last recession, Bitcoin has come out on top during one of the longest bull markets in history. However, the real test for Bitcoin may be in the coming years through the forthcoming recession, which is predicted to be severe than the last one.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 Sreekumar