In times of economic chaos, where do investors turn on a global scale? In a general sense, they move into assets that may be considered macro-hedges, which we’ve mentioned before in a previous posts. These macro-hedges gain their name from being “safe havens” against the financial effects of global events like economic recessions.
What is a safe haven?
Though different definitions exist, the general consensus among experts appears to be that a safe haven is something of value that tends to move up or at least stay consistent in value while other assets and their respective markets are falling. From the get-go since its launch, Bitcoin has been defined as a safe haven, with various analysts and publications attempt to do that based solely upon market data. While this works well for assets and commodities with true global market longevity, for Bitcoin, a different avenue is ideal.
The Case for Gold
Usually, as said above, a safe haven is something of value that grows during turbulent times.
Perhaps the most famous example of this in practice is gold, especially from 1999–2020. When compared to the performance of the other leading global markets, i.e., stocks and bonds during the same timeframe, a key insight comes to light.
During the global recession of 2008, gold rocketed to an all-time high by March and kept climbing to new highs after that. Since then, it has performed significantly better than the the rest of the financial markets. Overall, this sort of performance is typically taken to be the easiest and most reliable metric to use when deciding whether or not an asset(or commodity) works as a safe haven. As long as it experiences growth when essentially nothing else does, then it fits the mold.
Lending further evidence to the case of gold as a safe haven is its performance recently during the continuing COVID-19 crisis. From December 2019-June 2020, for example, gold grew 16%, even in the face of March’s crash of the US stock markets and rapidly dwindling interest rates on bonds.
Truthfully, these are not even the only examples of gold performing as a safe haven.
In 2002, for example, gold gained 23.96% in the face of the aftermath of the dot-com bust during which most stocks were largely stagnant. Using this and the examples above, it’s easy to conclude that gold is the most effective ease haven since it has continually risen when basically nothing else has.
Still, no safe haven is perfect. Over the course of 2000, when the dot-com bubble began to burst, gold fell 6.26%. Though this may seem to invalidate the case we’ve been presenting, in fact, it doesn’t. Truthfully, a safe haven is defined less by its behavior during the outset of a crisis and more by its behavior as it unfolds and after. In zooming out to 2000–2002, gold’s aggregated growth becomes 19.11%, which helps to hammer home this idea.
What’s the downside of a safe haven (via gold)?
Because it rises when, for example, stocks and bonds do not, gold is also considered to be relatively inversely correlated to these markets. In case you’re not familiar with the term, what it means is that when stocks and bonds go up, the asset that’s inversely correlated doesn’t, at least not as much. One effective illustration of this is gold’s performance during the height of the dot-com bubble when most of the world was pouring money into stocks and little else. From 1995–2000, when the bubble was taking place, gold’s price fell every year, except for 1995 and 1999. Furthermore and perhaps more importantly, its average(mean) growth was -5.12%, illustrating a consistent downtrend.
Since the global financial industry largely treats gold as the leading safe haven, this data can be used to conclude that to be a safe haven, an asset(or commodity) needs to fall during times of economic prosperity.
Enter Bitcoin: A Better Safe Haven?
From its launch in 2009, Bitcoin has always been set up as a true macro-hedge or safe haven, because of just how revolutionary it is. Before it existed, there was never any other decentralized currency that truly worked in practice and consequently, the entire world had always been dependent on fiat-run systems or systems that could always be manipulated by the governments involved with them.
Looking all the way back to the Bitcoin white paper, it’s easy to see where the moniker of “digital gold” came from. In it, Satoshi Nakamoto compared Bitcoin mining to gold mining and set the process up as the necessary expenditure for Bitcoin issuance. It wasn’t until the publication of Nathaniel Popper’s, Digital Gold in 2015, however, that the narrative of Bitcoin being the new and improved form of gold began to take flight. While we’ve introduced the high points of that case in a previous post, suffice it to say that the argument for Bitcoin being the new gold boils down to one key fact.
It’s the first asset that was ever provably digitally scarce since only 21 million bitcoins can ever be released and no one will ever be able to change that. Adding to its scarcity is the fact that currently, only 6.25 bitcoins are released every block (every 10 minutes), which is a number that decreases every four years via an event called a “halving.” Once the last halving occurs, no more new bitcoins will ever be issued.
With gold, by comparison, there’s no indication of a hard-limit to its supply as of yet. On the contrary, since the popularization of the possibility of asteroid mining last year, it’s become clear that gold might be a whole lot more available than anyone ever thought it would be. Since gold’s value heavily depends on its perceived scarcity, it’s quite reasonable to expect that its value will drop over the long-term as its supply increases.
In Bitcoin’s case, such an event can never happen. No new bitcoins can ever be just randomly discovered and to change its all-time supply, the majority of Bitcoin developers would have to agree on changing what is the most foundational aspect of its value. To date, there’s no indication that anything like that will ever get anywhere close to occurring. Yes, forks have been made, but these are networks inspired by Bitcoin and through it all, it has always stood strong in its original form.
The Bear Case for Bitcoin as a Safe Haven
Before attempting to conclude whether or not Bitcoin is a safe haven, it’s important to present the case against it achieving that status. First and most recently, it’s been claimed by certain analysts and news outlets that Bitcoin can’t be a safe haven because it fell when the US stock market fell in March 2020, at the height of the COVID-19 crisis.
This is a short-sighted conclusion, however, because Bitcoin’s only been around 2009 and COVID-19 is effectively the first major test of the theory that it’s digital gold and consequently, a better safe haven. Furthermore, until COVID-19 has largely ended and the global markets have truly rebounded, it won’t be reasonable to make any sort of conclusion on what served as a safe haven during these times.
On top of the comparison to stocks during the height of COVID-19, Bitcoin bears also tend to bring up its historical volatility as an indicator that it can’t be a reliable safe haven because it doesn’t really function as a store of value.
Working against this is the idea that using volatility as a quantifier of whether an asset is a safe haven is a deceptive path to follow. First, volatility is merely a measure of any sort of variation in an asset’s price over time, both upward and downward. Next, since Bitcoin’s historical volatility has been falling since its launch and has reached its all-time low this year, as shown below, it seems clear that volatility no longer serves as a strong case against it.
Yes, admittedly, 2020 does show a large upward spike in volatility but that was during the aforementioned period of last March, which Yassine Elmandjra of Ark Investments explained as less of a crisis of confidence and more of a crisis of “liquidity.” What this refers to is the proven trend that when times get particularly tough, investors sell across asset classes to move back into what are seen as “safer” asset classes like cash. While this may present itself as if it were a crisis of confidence as well, when certain data is considered, it becomes clear that this wasn’t the case.
The Importance of Revived Supply During Turbulent Times
In the context of Bitcoin, revived supply, refers to how many coins come back into circulation or start moving once again during a time of particularly high market volatility. According to Elmandjra, in March, what this metric showed was that the vast majority of new movement was with coins that had been held for a year or less. Ergo, those who believe in Bitcoin’s fundamentals and are long-term investor, or “HODLers,” stayed steadfast.
As the COVID-19 pandemic continues to play out, it would be reasonable to continue to use this metric alongside others to continue to get a balanced view of how Bitcoin is performing as a safe haven.
What other metrics could be used to test the case?
Volatility, price movement(measured by yearly % growth), and models like the stock-to-flow model have been helpful in testing Bitcoin’s status as a safe haven, and therefore also as a store of value.
Still, the best combination of metrics would like be revived supply over the long-term, growth in global Bitcoin users, and price-growth. Using this sort of trifecta, it would be simple for anyone to understand the road that Bitcoin’s taking and whether or not the endpoint is it being a safe haven or not.
So, is Bitcoin a Safe Haven?
As suggested, in the previous paragraph, it isn’t yet.
Still, if its current path continues as it has been, then it’s reasonable to expect that it will become one down the road. Adding to this are the cases of the firm, MicroStrategy adopting Bitcoin as its “primary treasury reserve asset” this year, which refers to it using Bitcoin as part of a capital allocation strategy to store value and provide a safe haven for both the firm and its investors. Given that their holdings are now sitting at 38,250 Bitcoins(as of September) after only two purchases, this seems to show the first major example of a traditional firm buying into the digital gold narrative. Put this together with the news earlier this year that hedge fund manager Paul Tudor Jones appears to be using Bitcoin as a diverisifier (with a 2% allocation) and the global financial industry’s reaction to it and you can truly begin to see the progress that Bitcoin’s making. All in all, there’s nothing that sums up Bitcoin’s progress better than a quote from well-known analyst Mike McGlone’s recent crypto report for Bloomberg.
“The primary attributes that underpin the price of gold and bitcoin — limited supply, store of value, diversifier and quasi-currency — will persist in a world of unprecedented quantitative easing, in our view. The benchmark crypto has won the adoption race among myriad copycats and is maturing into a digital version of gold.”
With this, it’s important to clarify that Bitcoin becoming “digital gold” doesn’t mean gold will die out. On the contrary, here at NBX, we’re committed to a tokenized future, which means that we believe that one day, everything will live on the blockchain and be as easily tradeable as Bitcoin. If you’d like to learn more about our vision, check out our roadmap and our explainer on tokenized metals as well.
Circling back to this discussion, however, in the end, it’s best to consider what you’ve just read as building upon the foundational case for Bitcoin as digital gold that we’ve previously mentioned. Over time, you can expect more content from us at NBX that explores the other valuation models of Bitcoin and any other crypto asset we support as well, starting with how market(trader) psychology drives crypto market activity. All in all, our aim in presenting these models is to help you develop as balanced an understanding of the crypto space as possible. If that interests you, follow our blog here, while also checking out our Knowledge Base.